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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2011

2014

or

o¨  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 of organization) (I.R.S. Employer Identification No.)
800 Philadelphia Street, Indiana, PA 15701
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (800) 325-2265

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, par value $2.50 per share 
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨o    No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ¨o    No   x

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  ¨o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K.  ¨o

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 (§ 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  ¨o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨x
 
Accelerated filer  xo
Non-accelerated filer  ¨o (Do not check if a smaller reporting company)
 
Smaller reporting company  ¨o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  o    Yes  ¨No   x

The aggregate estimated fair value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2011:

2014:

Common Stock, $2.50 par value – $505,369,206

$723,040,943

The number of shares outstanding of the issuer’s classes of common stock as of January 31, 2012:

February 18, 2015:

Common Stock, $2.50 par value – 28,133,371 shares–29,796,397

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statementdefinitive Proxy Statement of S&T Bancorp, Inc., to be filed with the Securities and Exchange Commissionpursuant to Regulation 14A for the 2015 annual meeting of shareholders meeting to be held April 23, 2012May 20, 2015 are incorporated by reference into Part III.

III of this annual report on Form 10-K.


Table of Contents



Part I
 
Item 1.
Business
3
Item 1A.
Risk Factors
10
Item 1B.
Unresolved Staff Comments
14
Item 2.
Properties
15
Item 3.
Legal Proceedings
15
Item 4.
Mine Safety Disclosures
15
  
3
Part II
 
Item 1A.Risk Factors13
Item 1B.Unresolved Staff Comments20
Item 2.Properties20
Item 3.Legal Proceedings21
Item 4.Mine Safety Disclosures21
Part II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
22
16
Item 6.
Selected Financial Data
24
17
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
20
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
61
55
Item 8.
Financial Statements and Supplementary Data
64
56
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
116
Item 9A.
Controls and Procedures
116
Item 9B.
Other Information
116
  
126
Part III
 
Item 9A.Controls and Procedures126
Item 9B.Other Information126
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
127
117
Item 11.
Executive Compensation
127
117
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
127
117
Item 13.
Certain Relationships and Related Transactions, and Director Independence
127
117
Item 14.
Principal Accountant Fees and Services
117
 128 
Part IV
 
Item 15.
Exhibits, and Financial Statement Schedules
118
 129
Signatures
132
121

PAGE



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PART I

Item 1.  BUSINESS

General

S&T Bancorp, Inc., or S&T references(also referred to below as “we”, “us” or “our” refers to S&T,), including, on a consolidated basis with our subsidiaries where appropriate, was incorporated on March 17, 1983 under the laws of the Commonwealth of Pennsylvania as a bank holding company and has three wholly owned subsidiaries, S&T Bank, 9th Street Holdings, Inc. and STBA Capital
Trust I. We also own a one-half interest in Commonwealth Trust Credit Life Insurance Company, or CTCLIC. We are registered as a financial holding company with the Board of Governors of the Federal Reserve System, or the Federal Reserve Board, under the Bank Holding Company Act of 1956, as amended, or the BHCA. As of December 31, 2011,2014, we had approximately $4.1$5.0 billion in assets, $3.1$3.9 billion in loans, $3.3$3.9 billion in deposits and $490.5 million in shareholder’s equity.

our shareholders’ equity was $608.4 million.

S&T Bank is a full service bank with its Main Officemain office at 800 Philadelphia Street, Indiana, Pennsylvania, providing services to its customers through offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Centre, Clarion, Clearfield, Indiana, Jefferson, Washington and Westmoreland counties of Pennsylvania. We also have two loan production offices, or LPOs, in Ohio, with our most recent LPO established in central Ohio on March 24, 2014. On June 18, 2014, we opened a new branch with a team of experienced banking professionals in State College, Pennsylvania. On October 29, 2014 we entered into an agreement to acquire Integrity Bancshares, Inc. We expect to complete the transaction in the first quarter of 2015, after satisfaction of customary closing conditions, including regulatory approvals and the approval of the shareholders of Integrity Bancshares, Inc. S&T Bank deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the maximum extent provided by law.

S&T Bank has fourthree wholly owned operating subsidiaries: S&T Insurance Group, LLC, S&T Professional Resources Group, LLC, S&T Bancholdings, Inc. and Stewart Capital Advisors, LLC. S&T Insurance Group, LLC, through its subsidiaries, offers a variety of insurance products. S&T Professional Resources Group, LLC markets software developed by S&T Bank. S&T Bancholdings, Inc. is an investment company. Stewart Capital Advisors, LLC, is a registered investment advisor that manages private investment accounts for individuals and institutions and advises the Stewart Capital Mid Cap Fund.

We operatehave three reportable operating segments including Community Banking, Wealth Management and Insurance. Our Community Banking segment offers services which include accepting time and demand deposit accounts,deposits, originating commercial and consumer loans, and providing letters of credit and credit card services. We believe that we have a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including federal, state and local governments). Our core deposit base remained strong in 2011.

The Wealth Management segment offers discount brokerage services, servicesserves as executor and trustee under wills and deeds, guardian and custodian of employee benefits and other trust and brokerage services, as well as is a registered investment advisor that manages private investment accounts for individuals and institutions. Total Wealth Management assets under management and administration were approximately $1.5$2.0 billion at December 31, 2011.

2014. The Insurance segment includes a full-service insurance agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions and personal insurance lines.

Recent Developments

On September 14, 2011, we announced the signing of a definitive merger agreement to acquire Mainline Bancorp, Inc., or Mainline, a bank holding company based in Ebensburg, Pennsylvania. Mainline, with approximately $236 million in assets, maintains eight offices in Cambria and Blair counties in Pennsylvania. The transaction, valued at approximately $21 million, is expected to be completed in the first quarter of 2012 pending the approval of the shareholders of Mainline and satisfaction of other customary closing conditions.

On December 7, 2011, we announced that we redeemed all of the preferred stock that we sold

Refer to the U.S. Departmentfinancial statements and Part II, Item 8, Note 23 of the Treasury in January of 2009 as part of the Capital Purchase Program, or the CPP. The redemption of the preferred stock was approved without any conditions from regulators.

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Item 1.  BUSINESS — continued

We used available cash to fund the repurchase of the outstanding preferred stock for $108.7 million and the payment of the final dividend of $0.3 million. Refer to “Capital Purchase Program” later in this sectionForm 10-K for further information.

details pertaining to our operating segments.

Employees

As of December 31, 2011,2014, we had 909945 full-time equivalent employees.

Access to United States Securities and Exchange Commission Filings

All of our reports filed electronically with the United States Securities and Exchange Commission, or the SEC, including this Annual Report on Form 10-K for the fiscal year ended December 31, 2011,2014, or the Report, our prior annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and our annual proxy statements, as well as any amendments to those reports, are accessible at no cost on our website at www.stbancorp.com under Financial Information,
SEC Filings. These filings are also accessible on the SEC’s website at www.sec.gov. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. OurThe charters of the Audit Committee, the Compensation and Benefits Committee and the Nominating and Corporate Governance Committee, the Wealth Management Oversight Committee, Complaints Regarding Accounting, Internal Accounting Controls or Auditing Matters Policy, or the Whistleblower Policy, the Code of Conduct for the CEO and CFO, the General Code of Conduct and the Shareholder Communications Policy, and S&T Excessive and Luxury Expenditure Policy are also available at www.stbancorp.com under Corporate Governance.


3
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Item 1.  BUSINESS -- continued




Supervision and Regulation

General

S&T and S&T Bank are each extensively regulated under federal and state law. The following describes certain aspects of that regulation and does not purport to be a complete description of all regulations that affect S&T and S&T Bank or all aspects of those regulations.

any regulation discussed here.

To the extent statutory or regulatory provisions are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on S&T or S&T Bank is impossible to determine with any certainty.

Any change in applicable laws or regulations, or in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on our business, operations and earnings.

S&T

We are a bank holding company subject to regulation under the BHCA and the examination and reporting requirements of the Federal Reserve Board. Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than five percent of the voting shares or substantially all of the assets of any additional bank, or merge or consolidate with another bank holding company, without the prior approval of the Federal Reserve Board. We have received approval from the Federal Reserve Board formaintained a passive ownership position in Allegheny Valley Bancorp, Inc. (14.5(14.3 percent).

pursuant to approval from the Federal Reserve Board.

As a bank holding company, we are expected under statutory and regulatory provisions to serve as a source of financial and managerial strength to our subsidiary bank. A bank holding company is also expected to commit resources, including capital and other funds, to support its subsidiary bank.

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Item 1.  BUSINESS — continued

We elected to become a financial holding company under the BHCA in 2001 and thereby engage in a broader range of financial and other activities than are permissible for traditional bank holding companies. In order to qualify and maintain our status as a financial holding company, we must remain “well-capitalized” and “well-managed” and the depository institutions controlled by us must remain “well-capitalized,” “well-managed” (as defined in federal law) and have at least a “satisfactory” Community Reinvestment Act or CRA("CRA") rating. Refer to Part II, Item 8, Note 2122 Regulatory Matters, of this Report for information concerning the current capital ratios of S&T and S&T Bank. No prior regulatory approval is required for a financial holding company with total consolidated assets less than $50 billion to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.Board, unless the total consolidated assets to be acquired exceed $10 billion. The BHCA identifies several activities as “financial in nature” including, among others, securities underwriting,underwriting; dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and sales agency; investment advisory activities; merchant banking activities;activities and activities that the Federal Reserve Board has determined to be closely related to banking or a proper incident thereto.banking. Banks may also engage in, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is “well-capitalized,” “well-managed” and has at least a “satisfactory” CRA rating. On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act into law, which required that we also remain “well-capitalized” and “well-managed” in order to maintain our status as a financial holding company as of July 21, 2011, which is the Designated Transfer Date. Additionally, the Dodd-Frank Act requires a financial holding company to obtain prior regulatory approval to acquire any company with consolidated assets that exceed $10.0 billion.

If S&T andor S&T Bank ceaseceases to be “well-capitalized” or “well-managed,” we will not be in compliance with the requirements of the BHCA regarding financial holding companies. companies or requirements regarding the operation of financial subsidiaries by insured banks.
If a financial holding company is notified by the Federal Reserve Board of such a change in the ratings of any of its subsidiary banks, it must take certain corrective actions within specified time frames. Furthermore, if S&T Bank werewas to receive a CRA rating of less than “satisfactory,” then we would be prohibited from engaging in certain new activities or acquiring companies engaged in certain financial activities until the rating is raised to “satisfactory” or better.

We are presently engaged in nonbanking activities through the following sixfive entities:

9th Street Holdings, Inc. was formed in June 1988 to hold and manage a group of investments previously owned by S&T Bank and to give us additional latitude to purchase other investments.

S&T Bancholdings, Inc. was formed in August 2002 to hold and manage a group of investments previously owned by S&T Bank and to give us additional latitude to purchase other investments.

CTCLIC is a joint venture with another financial institution, acting as a reinsurer of credit life, accident and health insurance policies sold by S&T Bank and the other institution.

S&T Bank and the other institution each have ownership interests of 50 percent in CTCLIC.

S&T Insurance Group, LLC distributes life insurance and long-term disability income insurance products. During 2001, S&T Insurance Group, LLC and Attorneys Abstract Company, Inc. entered into an agreement to form S&T Settlement


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Item 1.  BUSINESS -- continued




Services, LLC, or STSS, with respective ownership interests of 55 percent and 45 percent. STSS is a title insurance agency servicing commercial customers. During 2002, S&T Insurance Group, LLC expanded into the property and casualty insurance business with the acquisition of S&T-Evergreen Insurance LLC.

S&T Professional Resources Group LLC markets software developed by S&T Bank.

Stewart Capital Advisors, LLC was formed in August 2005 and is a registered investment advisor that manages private investment accounts for individuals and institutions and advises the Stewart Capital Mid Cap Fund.

PAGE 5

Item 1.  BUSINESS — continued


S&T Bank

As a state-chartered,Pennsylvania-chartered, FDIC-insured commercial bank, the deposits of S&T Bank are insured by the FDIC, S&T Bank is subject to the supervision and regulation of the Pennsylvania Department of Banking and Securities, or PADBPADBS, and the FDIC. We are also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be granted and limits on the typetypes of other activities in which S&T Bank may engage and the investments it may make.

In addition, S&T Bank is subject to affiliate transaction rules in Sections 23A and 23B of the Federal Reserve Act that limit the amount of transactions between itself and S&T or S&T’s nonbank subsidiaries. Under these provisions, transactions between a bank and its parent company or any single nonbank affiliate generally are limited to 10 percent of the bank subsidiary’s capital and surplus, and with respect to all transactions with affiliates, are limited to 20 percent of the bank subsidiary’s capital and surplus. Further, loansLoans and extensions of credit from a bank to an affiliate generally are required to be secured by eligible collateral in specified amounts. The Dodd-Frank Act Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, expands the affiliate transaction rules to broaden the definition of affiliate and to apply to securities borrowing or lending, repurchase agreementor reverse repurchase agreements and derivatives activities that we may have with an affiliate, as well as to strengthen collateral requirements and limit Federal Reserve exemptive authority. Also, the definition of “extension of credit” for transactions with executive officers, directors and principal shareholders is beingwas expanded to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction. These expansions will bebecame effective one year after the Designated Transfer Date, July 21, 2012. At this time, we doThese provisions have not anticipate that these provisions will havehad a material effect on S&T or S&T Bank.

Insurance of Accounts; Depositor Preference

The deposits of S&T Bank are insured up to applicable limits per insured depositor by the FDIC. The Dodd-Frank Act codified FDIC deposit insurance coverage per separately insured depositor for all account types at $250,000. The Dodd-Frank Act also maintains federal deposit insurance coverage for noninterest-bearing transaction accounts at an unlimited amount from December 31, 2010 until December 31, 2012. Interest on Lawyer Trust Accounts will be considered “noninterest-bearing transaction accounts” for purposes of temporary unlimited deposit insurance coverage.

As an FDIC-insured bank, S&T Bank is also subject to FDIC insurance assessments, which are imposed based upon the risk the institution poses to the Deposit Insurance Fund, or DIF. Under this assessment system, risk is defined and measured using an institution’s supervisory ratings with other risk measures, including financial ratios. The annualcurrent total base assessment rates for institutions in 2011 rangedon an annualized basis range from 2.5 basis points for certain “well-capitalized,” “well-managed” banks, with the highest ratings, to 45 basis points for institutions posing the most risk to the DIF. The FDIC may raise or lower these assessment rates on a quarterly basis based on various factors to achieve a reserve ratio, which the Dodd-Frank Act has mandated to be no less than 1.35 percent of insured deposits.

Due to recent bank failures and contingent loss reserves established by the FDIC against potential future bank failures, the reserve ratio is currently significantly below its target balance. Thus, on November 12, 2009, the FDIC Board of Directors adopted a final rule that required insured depository institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012, along with their quarterly risk-based assessment for the third quarter of 2009. The continued decline in the DIF balance may convince the FDIC to impose additional special emergency assessments in the future, which could have an impact on S&T Bank’s earnings and capital levels. The prepayment for our quarterly assessments amounted to $21.1 million and will be recognized as expense over a three year period. As of December 31, 2011, $11.6 million remains prepaid for quarterly FDIC assessments.

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Item 1.  BUSINESS — continued

On October 19, 2010, the Board of Directors of the FDIC adopted a new Restoration Plan to ensure that the DIF reserve ratio reaches 1.35 percent by September 30, 2020, as required by the Federal Deposit Insurance Reform Act of 2005, or the Reform Act. Among other things, the Restoration Plan provided that the FDIC would forego the uniform three basis point increase in initial assessment rates that was previously scheduled to take effect on January 1, 2011 and would maintain the current assessment rate schedule for all insured depository institutions until the reserve ratio reaches 1.15 percent.

In February 2011, the FDIC Board of Directors adopted a final rule, Deposit Insurance Assessment Base, Assessment Rate Adjustments, Dividends, Assessment Rates and Large Bank Pricing Methodology, to redefineMethodology. This final rule redefined the deposit insurance assessment base to equal average consolidated total assets minus average tangible equity as required by the Dodd-Frank Act, alteraltered assessment rates, implementimplemented the Dodd-Frank Act’s DIF dividend provisions and reviserevised the risk-based assessment system for all large insured depository institutions (those with at least $10.0 billion in total assets). Many of the changes were made as a result of provisions of the Dodd-Frank Act that were intended to shift more of the cost of raising the reserve ratio from institutions with less than $10.0 billion in assets (such as S&T Bank) to the larger banks. Except for the future assessment rate schedules, all changes went into effect April 1, 2011 and did not have a material effect upon our consolidated operating results.has resulted in lower FDIC expense. In addition to DIF assessments, the FDIC assesses all insured depositsmakes a special assessment to fund the repayment of debt obligations of the Financing Corporation, or FICO. FICO is a government-sponsored entity that was formed to borrow the money necessary to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution Trust Corporation in the 1990s. As of January 1, 2012, the annualizedThe FICO assessment rate established by the FDIC for the FICO assessment was 0.66first quarter of 2015 is 0.600 basis points per $100 of insured deposits.

on an annualized basis.

Under federal law, deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by a receiver. Such priority creditors would include the FDIC.

Capital

The Federal Reserve Board and FDIC have issued substantially similar risk-based and leverage capital guidelinesrules applicable to banking organizations they supervise. Under current capital guidelines,At December 31, 2014, both S&T and S&T Bank are required to maintain certainmet the applicable regulatory capital standards based on ratios

5
Table of capital to assets and capital to risk weighted assets. The guidelines define a bank’s total qualifying capital as having two components. Tier 1 capital, which must be at least 50 percent of total qualifying capital, is mainly comprised of common equity, retained earnings and qualifying preferred stock, less certain intangibles. Tier 2 capital may include the allowance for loan losses, or ALL, model loss up to a maximum of 1.25 percent of risk weighted assets, qualifying subordinated debt, qualifying preferred stock, hybrid capital instruments and up to 45 percent of net unrealized gains on available-for-sale equity securities. The guideline also defines the weights assigned to assets and off-balance sheet items to determine the risk weighted asset component of the risk-based capital ratios.

The Federal Reserve Board and FDIC have established minimum and well-capitalized standards for banks. The minimum capital standards are defined as a Tier 1 ratio of at least 4.00 percent, a Total capital ratio of at least 8.00 percent and a Leverage ratio of at least 3.00 percent. The Leverage ratio of 3.00 percent is for those bank and bank holding companies that meet certain specified criteria, including having received the highest regulatory rating and are not experiencing significant growth or expansion. All other banks and bank holding companies generally are required to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. S&T and S&T Bank maintain capital levels to meet the well-capitalized regulatory standards, which are defined as a Tier 1 ratio of at least 6.00 percent, Total capital ratio of at least 10.00 percent and a Leverage ratio of at least 5.00 percent. At December 31, 2011Contents


Item 1.  BUSINESS -- continued




requirements. S&T’s Tier 1 risk-based capital Totalratio was 12.34 percent, total risk-based capital and Leverage ratios were 11.63

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Item 1.  BUSINESS — continued

percent, 15.20ratio was 14.27 percent and 9.17 percent, respectively. At December 31, 2011leverage ratio was 9.80 percent. S&T Bank’s Tier 1 Totalrisk-based capital, total risk-based capital and Leverageleverage ratios were 10.5510.76 percent, 14.1112.68 percent, and 8.30 percent, respectively.

Both8.53 percent.

In July 2013 the Federal Reserve Board and the FDIC’s risk-based capital standards explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure tofederal banking agencies issued a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a bank’s capital adequacy. The Federal Reserve Board has also issued additional capital guidelines for certain bank holding companies that engage in trading activities. We do not believe that consideration of these additional factors will affect the regulators’ assessment of S&T or S&T Bank’s capital position. The Dodd-Frank Act contains a number of provisions intended to strengthen capital, including requiring minimum leverage and risk-based capital that are at least as stringent as those currently in effect. The regulations implementing these rules were finalized by the FDIC in June, 2011. Most of the finalized rules pertain to those institutions with more than $50 billion in assets. Also, upon the Designated Transfer Date, the Dodd-Frank Act requires the Federal Reserve Boardfinal rule to implement capital regulations that are countercyclical so that the amount of capital required to be maintainedBasel III (which were agreements reached in July 2010 by us would increase in times of economic expansion and decrease in times of economic contraction, consistent with the safety and soundness of the company. Comments on the Federal Reserve Board’s proposal are due by March, 2012. In addition to the Dodd-Frank Act, the international oversight body of the Basel Committee on Banking Supervision or Basel III, reached agreements in July, 2010 to increaserequire more and higher-quality capital) as well as the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. The final rule establishes a comprehensive capital framework, and went into effect on January 1, 2015, for smaller banking organizations such as S&T and S&T Bank. It introduces a common equity Tier 1 risk-based capital ratio requirement for banks from 2.00of 4.50 percent, increases the minimum Tier 1 risk-based capital ratio to 6.00 percent, and requires a leverage ratio of 4.00 percent along withfor all banks. Common equity Tier 1 capital consists of common stock instruments that meet the eligibility criteria in the rule, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority interest. The rule also requires a banking organization to maintain a capital conservation buffer composed of common equity Tier 1 capital in an amount greater than 2.50 percent to bringof total common equityrisk-weighted assets beginning in 2019. The capital requirements to 7.00 percent. The Basel III requirementsconservation buffer will be phased in beginning Januaryin 2016, at 25 percent, increasing to 50 percent in 2017, 75 percent in 2018 and 100 percent in 2019 and beyond. As a result, starting in 2019, a banking organization must maintain a common equity Tier 1 2013. risk-based capital ratio greater than 7.00 percent, a Tier 1 risk-based capital ratio greater than 8.50 percent and a Total risk-based capital ratio greater than 10.50 percent; otherwise, it will be subject to restrictions on capital distributions and discretionary bonus payments. By 2019, when the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the regulatory capital ratios required for an insured depository institution to be well-capitalized under prompt corrective action law, described below. To be well-capitalized, an insured bank must have a common equity Tier 1 risk-based capital ratio of at least 6.50 percent, a Tier 1 risk-based capital ratio of at least 8.00 percent, a total risk-based capital ratio of at least 10.00 percent, and a leverage ratio of 5.00 percent. The rule also disqualifies certain financial instruments from inclusion in regulatory capital and requires more deductions from capital.
The new regulatory capital rule also revises the calculation of risk-weighted assets. It includes a new framework under which the risk weight will increase for most credit exposures that are 90 days or more past due or on nonaccrual, high-volatility commercial real estate loans and certain equity exposures. It also includes changes to the credit conversion factors of off-balance sheet items, such as the unused portion of a loan commitment.
Federal regulators periodically propose amendments to the risk-basedregulatory capital guidelinesrules and the related regulatory framework and consider changes to the capital standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form and effect of any such proposed amendments cannot be predicted.

Capital Purchase Program

On December 7, 2011, we redeemed all of the preferred stock that we sold to the federal government as part of the CPP. As a participant in the CPP, we completed the $108.7 million capital raise on January 16, 2009.

In connection with the issuance of the preferred stock to the U.S. Treasury in 2009, we also issued the U.S. Treasury a warrant to purchase 517,012 shares of our common stock at an initial per share exercise price of $31.53, with an estimated fair value of $4.0 million on the date of issuance. The warrant remains outstanding as of the date of the filing of this Annual Report on Form 10-K. The warrant provides for the adjustment of the exercise price and the number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution provisions. The U.S. Treasury agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant. We did not repurchase the warrant concurrently with the redemption of the preferred stock. Unless we repurchase the warrant, it will remain outstanding and will expire 10 years from the issuance date.

Under changes made to the CPP by the American Recovery and Reinvestment Act of 2009, we were able to redeem the Series A Preferred Stock, plus any accrued and unpaid dividends, at any time, subject to approval by banking regulatory agencies. The redemption of the preferred stock eliminates certain restrictions imposed on us by our participation in the CPP, including limitations on executive compensation and certain increases to our dividend payments. We used available cash to fund the repurchase of the preferred stock of $108.7 million and payment of the final dividend of $0.3 million.

PAGE 8

Item 1.  BUSINESS — continued

Payment of Dividends

S&T is a legal entity separate and distinct from its banking and other subsidiaries. A substantial portion of our revenues consist of dividend payments we receive from S&T Bank. S&T Bank, in turn, is subject to federal and state laws and regulations that limit the amount of dividends it can pay to S&T. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. Thus, under certain circumstances based upon our financial condition, our ability to declare and pay quarterly dividends may require consultation with the Federal Reserve Board and may be prohibited by applicable Federal Reserve Board regulations. If we were to pay a dividend in contravention of Federal Reserve regulations, the Federal Reserve could raise supervisory concerns. During the year ended December 31, 2011, S&T Bank paid $16.8 million in cash dividends to us for dividends paid to common shareholders.

guidance.


Other Safety and Soundness Regulations

There are a number of obligations and restrictions imposed on bank holding companies such as us and our depository institution subsidiary by federal law and regulatory policy. These obligations and restrictions are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDICFDIC’s deposit insurance fund in the event thean insured depository institution becomes in danger of default or is in default. Under current federal law, for example, the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” as defined by the law. Under regulations established byAs of December 31, 2014, S&T Bank was classified as “well-capitalized.” New definitions of these categories, as set forth in the federal banking agencies, a “well-capitalized”agencies’ final rule to implement Basel III and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act, became effective as of January 1, 2015. To be well-capitalized, an insured depository institution must have a common equity Tier 1 risk-based capital ratio of at least 6.50 percent, a Tier 1 risk-based capital ratio of at least 8.00 percent, a total risk-based capital ratio of at least 10.00 percent and a

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leverage ratio of at least 5.00 percent. To be adequately capitalized, an insured depository institution must have a common equity Tier 1 risk-based capital ratio of at least 4.50 percent, a Tier 1 risk-based capital ratio of at least 6.00 percent, a Total capital ratio of at least 10.00 percent and a leverage ratio of at least 5.00 percent and must not be subject to a capital directive or order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4.00 percent, a Totaltotal risk-based capital ratio of at least 8.00 percent and a leverage ratio of at least 4.00 percent. The most highly-rated financial institutions minimum requirement for the leverage ratio is 3.00 percent. As of December 31, 2011, S&T and S&T Bank were classified as “well-capitalized.” The classification of depository institutions is primarily for the purpose of applying the federal banking agencies’ prompt corrective action provisions and is not intended to be and should not be interpreted as a representation of overall financial condition or prospects of any financial institution.

The federal banking agencies’ prompt corrective action powers (which increase depending upon the degree to which an institution is undercapitalized) can include, among other things, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution’s parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution. For example, only a “well-capitalized” depository institution may accept brokered deposits without prior regulatory approval.

The federal banking agencies have also adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, fees and compensation fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage

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specified risks and exposures. The guidelines prohibit excessive compensation as an unsafe and unsound practice and characterize compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the agencies have adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not in compliance with any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an “undercapitalized” institution is subject under the prompt corrective action provisions described above.


Regulatory Enforcement Authority

The enforcement powers available to federal banking agencies are substantial and include, among other things and in addition to other powers described herein, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banks and bank holding companies and “institution affiliated parties,” as defined in the Federal Deposit Insurance Act, or FDIA.Act. In general, these enforcement actions may be initiated for violations of laws and regulations, as well as engagement in unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

At the state level, the PADBPADBS also has broad enforcement powers over S&T Bank, including the power to impose fines and other civil and criminal penalties and to appoint a conservator or receiver.

Interstate Banking and Branching

The BHCA currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide and state-imposed deposit concentration limits. In addition, because of changes to law made by the Dodd-Frank Act, S&T Bank may now establish de novo interstate branches in any state to the same extent that a bank chartered in that state could establish a branch.

Community Reinvestment and Consumer Protection Laws

In connection with its lending activities, S&T Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include, among other laws, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act and the CRA. In addition, rules developed byof the federal banking agenciesConsumer Financial Protection Bureau pursuant to federal law require disclosure of privacy policies to consumers and in some circumstances, allow consumers to prevent the disclosure of certain personal information to nonaffiliated third parties.

The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate-income neighborhoods. Furthermore, such assessment also is required of any bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. In the case of a bank holding company (including a financial holding company) applying for approval to acquire a bank or bank holding company, the Federal Reserve Board will assess the record of each subsidiary bank of the applicant

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bank holding company in considering the application. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory.” S&T Bank was rated “satisfactory” in its most recent CRA evaluation.

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Anti-Money Laundering Rules

S&T Bank is subject to the Bank Secrecy Act, its implementing regulations and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require S&T Bank to take steps to prevent the use of S&T Bankbank from being used to facilitate the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. S&T Bank is also required to develop and implement a comprehensive anti-money laundering compliance program. Banks must also have in place appropriate “know your customer” policies and procedures. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act of 2001 require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.


Government Actions and Legislation

The Dodd-Frank Act willis significantly changechanging the current bank regulatory structure and affectaffecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including S&T and S&T Bank. The Dodd-Frank Act contains a number of provisions intended to strengthen capital. Refer to Capital within Part I, Item 1 for additional information. For example, the federal banking agencies are directed to establish minimum leverage and risk-based capital that are at least as stringent as those currently in effect.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Act may not be known for many months or years.depend on the actions of regulatory agencies. The Dodd-Frank Act also contains provisions that expand the insurance assessment base and increase the scope of deposit insurance coverage.

Among other provisions, the SEC has enacted rules, required by the Dodd-Frank Act, giving stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The Dodd-Frank Act also authorizes the SEC to promulgate rules that would allowpayments and allowing certain stockholders to nominate their own candidates for election as directors using a company’s proxy materials. The legislation also directs the federal financial institution regulatory agencies to promulgate rules prohibiting excessive compensation being paid to financial institution executives.

In addition, in December of 2013, federal regulators adopted final regulations regarding the so-called Volcker Rule established in the Dodd-Frank Act. The Volcker Rule generally prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (generally covering hedge funds and private equity funds, subject to certain exemptions). The rules are complex and it is not clear how they will be implemented over time. However, S&T does not currently anticipate that they will have a material effect on S&T Bank or its affiliates, because we do not engage in the prohibited activities.

The Dodd-Frank Act also created the Consumer Financial Protection Bureau, or CFPB, that took over rulemaking responsibility on July 21, 2011 offor the principal federal consumer financial protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in SavingSavings Act, among others. Institutions that have assets of $10.0 billion or less, such as S&T Bank, will continue to be supervised in this area by their state and primary federal regulators (in the case of S&T Bank, the FDIC). The Act also gives the CFPB expanded data collection powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices. The consumer complaint function also will behas been consolidated into the CFPB.CFPB with respect to the institutions it supervises. The CFPB established an Office forof Community Banks and Credit Unions, with a mission to ensure that the CFPB incorporates the perspectives of small depository institutions into the policy-making process, communicatecommunicates relevant policy initiatives to community banks and credit unions, and workworks with community banks and credit unions to identify potential areas for regulatory simplification. In addition, the Dodd-Frank Act required the Federal Reserve Board to adopt a rule addressing interchange fees applicable to debit card transactions. This rule, Regulation II, effective October 1, 2011, does not apply to banksa bank that, together with its affiliates, has less than $10.0 billion in assets. Since
In January 2013, the CFPB issued a series of final rules related to mortgage loan origination and mortgage loan servicing. In particular, on January 10, 2013, the CFPB issued a final rule has been in effect for only three months asimplementing the ability-to-repay and qualified mortgage (QM) provisions of the dateTruth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good-faith determinations that borrowers are able to repay their mortgage loans before extending the credit based on a number of this report, itfactors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is not yet known ifa conclusive presumption/safe harbor for prime loans meeting the rule may haveQM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the practical effectQM requirements. The definition of reducing fees that smaller banks (like S&T Bank) may charge.

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a “qualified mortgage” incorporates the statutory


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There





requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43 percent debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet government-sponsored enterprise, or GSE, Federal Housing Administration, or FHA, and Veterans Affairs, or VA, underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43 percent debt-to-income limits. The QM Rule became effective on January 10, 2014. These rules did not have been delays in the rulemaking processes of the variousa material impact on our mortgage business.
The federal agencies responsible for enactingimplementing the provisions of the Dodd-Frank Act. AsAct have issued a substantial number of December 31, 2011, less than 22 percent of the rulemaking requirements have been finalized, with only another 38.8 percent proposed.rules. More rules will be issued. Not all of the Dodd-Frank Act provisions remaining to be finalizedand their implementing regulations apply to banks the size of S&T BankBank. Federal and as a result, westate regulatory agencies consistently propose and adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predictassess the ultimate impact of the Act on S&T or S&T Bank at this time, including the extent to which it could increase costs or limit our ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our business, financial condition and results of operations. Nor can we predict the impact or substance of other future legislation or regulation. However, it is expected that they, at a minimum, will increase our operating and compliance costs.

Federal

In 2012, Pennsylvania enacted three bills known as the “Banking Law Modernization Package.” The bills became effective on December 24, 2012. The overall goal of the Banking Law Modernization Package was to modernize the banking laws of Pennsylvania and reduce regulatory burden at the state regulatory agencies consistently propose and adopt changes to their regulations or change the manner in which existing regulations are applied. level.
We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof, although enactment of theany proposed legislation could affect how S&T and S&T Bank operate and could significantly increase costs, impede the efficiency of internal business processes, or limit our ability to pursue business opportunities in an efficient manner, any of which could materially and adversely affect our business, financial condition and results of operations.

Competition

S&T Bank competes with other local, regional and national financial serviceservices providers, such as other financial holding companies, commercial banks, savings associations, credit unions, finance companies and brokerage and insurance firms. Some of our competitors are not subject to the same level of regulation and oversight that is required of banks and bank holding companies, and are thus able to operate under lower cost structures.

Changes in bank regulation, such as changes in the products and services banks can offer and permitted involvement in non-banking activities by bank holding companies, as well as bank mergers and acquisitions, can affect our ability to compete successfully. Legislation and regulations have also expanded the activities in which depository institutions may engage.with other financial services providers. Our ability to compete successfullydo so will depend upon how successfully we can respond to the evolving competitive, regulatory, technological and demographic developments affecting our operations.

We face significant competition

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 both originating loans and attracting deposits. The western Pennsylvaniathis market area resulting in a geographic concentration. Our market area has a high density of financial institutions, some of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, savings associations, mortgage banking companies, credit unions brokerage and insurance companies and other financial service companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. Because larger competitors have advantages in attracting business from larger corporations, we do not generally attempt to compete for that business. Instead, we concentrate our efforts on attracting the business of individuals, and small and medium-size businesses. We generally compete on the basis ofconsider our competitive advantages to be customer service and responsiveness to customer needs, the convenience of banking offices and hours, access to electronic banking services and the availability and pricing of our products and services. We emphasize personalized banking and the advantage of local decision-making in our banking business and this strategy appears to have been well received in our market area.

business.

The financial serviceservices industry is likely to become more competitive as further technological advances enable more companies to provide financial services on a more efficient and convenient basis. Technological innovations have lowered traditional barriers ofto entry and enabled many of these companies to compete in financial services markets. Many customers now expect a choice of banking options for the delivery of services, including traditional banking offices, telephone, mail, internet,

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mobile, banking, ATMs, self-service branches, and/or in-store branches. These productsdelivery channels are offered by traditional banks and savings associations, as well as credit unions, brokerage firms, asset management groups, finance and insurance companies, internet-based companies, and mortgage banking firms. We believe that our current market area, consisting primarily


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Table of western Pennsylvania, provides long-term opportunity for growth in deposits and commercial lending. Commercial and residential real estate values in our market appear to have stabilized. The national and local economies still remain fragile with high unemployment rates. Business conditions remain subdued and that uncertainty is serving to limit both consumer and corporate spending in our area.

Contents



Item 1A.  RISK FACTORS

Investments in our common stock involve risk. The following discussion highlights the risks that we believe are material to our company,S&T, but does not necessarily include all risks that we may face.

The market price of our common stock may fluctuate significantly in response to a number of factors.

Our quarterly and annual operating results have varied significantly in the past and could vary significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, including the changing and recently volatile U.S. economic environment and changes in the commercial and residential real estate market, any of which may cause our stock price to fluctuate. If our operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

volatility of stock market prices and volumes in general;

changes in market valuations of similar companies;

changes in conditions in credit markets;

changes in accounting policies or procedures as required by the Financial Accounting Standards Board, or FASB, or other regulatory agencies;

legislative and regulatory actions (including the impact of the Dodd-Frank Act and related regulations) subjectsubjecting us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model;

government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;

additions or departures of key members of management;

fluctuations in our quarterly or annual operating results; and

changes in analysts’ estimates of our financial performance.

Risks Related to Credit

Our ability to assess the credit worthinesscredit-worthiness of our customers may diminish, which may adversely affect our results of operations.

We take credit risk by virtue of making loans and extending loan commitments and letters of credit. Our exposure to credit risk is managed through the use of consistent underwriting standards that emphasize “in-market” lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. Our credit administration function employs risk management techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. There can be no assurance that such measures will be effective in avoiding undue credit risk. If the models and approaches we use to select, manage and underwrite our consumer and commercial

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customers loan products become less predictive of future charge-offs (due, for example, to rapid changes in the economy, including the unemployment rate), our credit losses may increase.

The value of the collateral used to secure our loans may not be sufficient to compensate for the amount of an unpaid loan and we may be unsuccessful in recovering the remaining balance from our customers.

Decreases in real estate values, particularly with respect to our commercial lending and mortgage activities, could adversely affect the value of property used as collateral for our loans and our customers’ ability to repay these loans, which in turn could impact our profitability. Repayment of our commercial loans is often dependent on the cash flow of the borrower, which may become unpredictable in the current economy.unpredictable. If the value of the assets, such as real estate, serving as collateral for the loan portfolio were to decline materially, a significant part of the loan portfolio could become under-collateralized. If the loans that are secured by real estate become troubled when real estate market conditions are declining or have declined, in the event of foreclosure, we may not be able to realize the amount of collateral that was anticipated at the time of originating the loan. This could result in higher chargescharge-offs which could have a material adverse effect on our operating results and financial condition.

Changes in the overall credit quality of our portfolio can have a significant impact on our earnings.

Like other lenders, we face the risk that our customers will not repay their loans. We reserve for losses in our loan portfolio based on our assessment of inherent credit losses. This process, which is critical to our financial results and condition, requires complex judgments,judgment including our assessment of economic conditions, which are difficult to predict. Through a periodic review of the loan portfolio, management determines the amount of the allowance for loan loss, or ALL, by considering historical losses combined with qualitative factors including general and regional economic conditions, asset quality trends, loan policy and underwriting and changes in loan concentrations and collateral values. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control. We may underestimate our inherent losses and fail to hold an ALL sufficient to account for these losses. Incorrect assumptions

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could lead to material underestimates of inherent losses and an inadequate ALL. As our assessment of inherent losses changes, we may need to increase or decrease our ALL, which could adversely impact our financial results and profitability.

Our loan portfolio is concentrated in western Pennsylvania, and our lack of geographic diversification increases our risk profile.

The regional economic conditions in western Pennsylvania affectsaffect the demand for our products and services as well as the ability of our customers to repay their loans and the value of the collateral securing these loans. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. A significant decline in the regional economy caused by inflation, recession, unemployment or other factors could adverselynegatively affect our customers, the quality of our loan portfolio and the demand for our products and services. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market area.

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A significant portion of our

Our loan portfolio includeshas a significant concentration of commercial real estate loans that have higher risks, and we may experience higher credit losses.

loans.

The majority of our loans are to commercial borrowers. The commercial real estate, or CRE, segment of our loan portfolio has beenis typically more adversely impacted by the continuing economic downturn. Commercial real estatefluctuations. CRE lending typically involves higher loan principal amounts, and the repayment of these loans is generally are dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Because payments on loans secured by commercial real estateCRE often depend upon the successful operatingoperation and management of the properties, repayment of these loans may be affected by factors outside the borrower’s control, including adverse conditions in the real estate market or the economy. Additionally, we have a number of significant loanscredit exposures to commercial borrowers, and while the majority of these borrowers have numerous projects that make up the total aggregate exposure, if one or more of these borrowers defaultsdefault or hashave financial difficulties, we could experience higher credit losses, which could adversely impact our financial condition and results of operations.

Risks Related to Our Operations
An interruption or security breach of our information systems may result in financial losses or in a loss of customers.
We depend upon data processing, communication and information exchange on a variety of computing platforms and networks, including the internet. We have experienced cyber security incidents in the past, which we did not deem material, and may experience them in the future. We believe that we have implemented appropriate measures to mitigate potential risks to our technology and our operations from these information technology disruptions. However, we cannot be certain that all of our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. The occurrence of any failures, interruptions or security breaches of our information systems could disrupt our continuity of operations or result in the disclosure of sensitive, personal customer information which could have a material adverse impact on our business, financial condition and results of operations through damage to our reputation, loss of customer business, remedial costs, additional regulatory scrutiny or exposure to civil litigation and possible financial liability. Losses arising from such a breach could materially exceed the amount of insurance coverage we have, which could adversely affect our results of operation.
We rely on third-party providers and other suppliers for a number of services that are important to our business. An interruption or cessation of an important service by any third party could have a material adverse effect on our business.
We are dependent for the majority of our technology, including our core operating system, on third party providers. If these companies were to discontinue providing services to us, we may experience significant disruption to our business. If any of our third party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services. We are dependent on these third-party retailers securing their information systems, over which we have no control, and a breach of their information systems could result in the disclosure of sensitive, personal customer information, which could have a material adverse impact on our business through damage to our reputation, loss of customer business, remedial costs, additional regulatory scrutiny or exposure to civil litigation and possible financial liability. Assurance cannot be provided that we could negotiate terms with alternative service sources that are as favorable or could obtain services with similar functionality as found in existing systems without the need to expend substantial resources, if at all, thereby resulting in a material adverse impact on our business and results of operations.

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Risks Related to Interest Rates and Investments

Our net interest income could be negatively affected by interest rate changes or by significant loan prepayments, which may adversely affect our financial condition.

Our results of operations are largely dependent on net interest income, which is the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. WeThere may havebe mismatches between the maturity and repricing of our assets and liabilities that could cause the net interest rate spread to compress, depending on the level and type of changes in the interest rate environment. Interest rates could remain at historical low levels causing rate spread compression over an extended period of time. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental agencies. In addition, some of our customers often have the ability to prepay loans or redeem deposits with either no penalties, or penalties that are insufficient to compensate us for the lost income. If customers continue to prepay loans at a higher rate, we may not be able to recover the lost revenues, which may affect our results of operations. A significant reduction in our net interest income will adversely affect our business and results of operations. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.

Declines in the value of investment securities held by us could require write-downs, which would reduce our earnings.

In order to diversify earnings and enhance liquidity, we own both debt and equity instruments of government agencies, municipalities and other companies. We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Additionally, the value of these investments may fluctuate depending on the interest rate environment, general economic conditions and circumstances specific to the issuer. Volatile market conditions may detrimentally affect the value of these securities, such as through reduced valuations due to the perception of heightened credit or liquidity risks. Changes in the value of these instruments may result in a reduction to earnings and/or capital, which may adversely affect our results of operations.

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Item 1A.  RISK FACTORS — continued

The crisis in both the United Statesoperations and international banking markets has adversely affected our industry, including our business, and may continue to have an adverse effect on our business and reputation in the future.

This economic turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and the lack of confidence in the financial markets have adversely affected our business, financial condition and results of operations. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions may increase the adverse effects of these difficult market conditions on us, and may harm the reputation of banks in general and our reputation with our customers and investors.

Risks Related to Liquidity

We rely on a stable core deposit base and high quality unpledged liquid assets as our primary sources of liquidity.

We are dependent for our funding on a stable base of core deposits and high quality unpledged assets including cash held on deposit at the Federal Reserve. Our ability to maintain a stable core deposit base is a function of our financial performance, our reputation and the security provided by FDIC insurance, which combined, gives customers confidence in us. If any of these items are damaged or come into question, the stability of our core deposits could be harmed. If these investments lose value or can not be sold in an orderly fashion, it could harm our ability to meet our obligations.

Our ability to meet contingency funding needs, in the event of a crisis that causes a disruption to our core deposit base, is dependent on access to wholesale markets, including funds provided by the FHLB of Pittsburgh.

We own common stock of the FHLB in order to qualify for membership in the FHLB system, which enables us to borrow funds under the FHLB advance program. Changes or disruptions to the FHLB or the FHLB system in general may materially impair our ability to meet short and long-term liquidity needs or meet growth plans. In the event of a system-wide shock or a deterioration in our financial condition, the stability of our core deposit base could deteriorate, our access to funding from the FHLB could be restricted, or both. Without access to adequate funding we will have difficulty operating day to day, which could ultimately impact our ability to continue operations.

If our FHLB line of credit is restricted, our ability to meet our obligations to our customers could be materially affected.

We have a line of credit with the FHLB that is secured by a blanket lien on our loan portfolio. Access to this line of credit is critical if a funding need arises. However, we cannot be assured that the FHLB will be able to provide funding to us when needed, nor can we be certain that the FHLB will provide funds specifically to us, should our financial condition and/or our regulators prevent that access. The inability to access these sources of funds could have a materially adverse effect on our ability to meet our customer’s needs. Our financial flexibility could be severely constrained if we were unable to maintain our access to funding or if adequate financing is not available at acceptable interest rates. The failure of the FHLB or the FHLB system in general, may materially impair our ability to meet short and long term liquidity needs or to meet growth plans.

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Item 1A.  RISK FACTORS — continued

condition.

Risks Related to Our Operations

An interruption or breach in securityBusiness Strategy

Our strategy includes growth plans through organic growth and by means of acquisitions, which includes growth within our information systems may result in financial losses or in a loss of customers.

We depend upon data processing, communicationcurrent footprint and information exchange on a variety of computing platforms and networks, including the internet. We cannot be certain that all of our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. The occurrence of any failures, interruptions or security breaches of our information systems could result in a material adverse impact to our business,growth through market expansion. Our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to continue pursuing a growth strategy through, damageorganic growth and by means of acquisitions, both within our current footprint and market expansion. In addition to our reputation, lossacquisition of customer business, additional regulatory scrutinyIntegrity Bancshares, Inc., which we expect to complete in the first quarter of 2015, we continue to evaluate acquisition opportunities as another source of growth. We cannot give assurance that we will be able to expand our existing market presence, or exposure to civil litigation and possible financial liability. Losses arising fromsuccessfully enter new markets or that any such a breach could materially exceed the amount of insurance coverage we have, which couldexpansion will not adversely affect our results of operation.

We rely on third-party providers and other suppliers for a number of services that are importantoperations. Failure to manage our business. An interruption or cessation of an important service by any third partygrowth effectively could have a material adverse effect on our business.

business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy.

Our failure to find suitable acquisition candidates, or successfully bid against other competitors for acquisitions, could adversely affect our ability to fully implement our business strategy. If we are successful in acquiring other entities, the process of integrating such entities, including Integrity Bancshares, Inc., will divert significant management time and resources. We may not be able to integrate efficiently or operate profitably Integrity Bancshares, Inc. or any other entity we may acquire. We may experience disruption and incur unexpected expenses in integrating acquisitions. These failures could adversely impact our future prospects and results of operation.
We are dependentsubject to competition from both banks and non-banking companies.
The financial services industry is highly competitive, and we encounter strong competition for the majoritydeposits, loans and other financial services in our market area. Our principal competitors include commercial banks of all types, finance companies, credit unions, mortgage brokers, insurance agencies, trust companies and various sellers of investments and investment advice. Many of our technology, including our core operating system, on third party providers. If these companies werenon-bank competitors are not subject to discontinuethe same degree of regulation that we are and have advantages over us in providing services to us, we may experience significant disruption to our business. If anycertain services. Additionally, many of our third party service providers experiencecompetitors are significantly larger than we are and have greater access to capital and other resources. Failure to compete effectively for deposit, loan and other financial operational or technological difficulties, or if there is any other disruptionservices customers in our relationships with them, wemarkets could cause us to lose market share, slow our growth rate and have an adverse effect on our financial condition and results of operations.
We may be required to locate alternative sourcesraise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.

12
Table of such services. AssuranceContents



We are required by federal regulatory authorities to maintain adequate capital levels to support operations. New regulations to implement Basel III and the Dodd-Frank Act require us to have more capital. While we believe we currently have sufficient capital, if we cannot raise additional capital when needed, we may not be providedable to meet these requirements. Also our ability to further expand our operations through organic growth, which includes growth within our current footprint and growth through market expansion may be adversely affected. Our ability to raise additional capital is dependent on capital market conditions at that we could negotiate terms with alternative service sources that are as favorable or could obtain services with similar functionality as found in existing systems without the need to expend substantial resources, if at all, thereby resulting in a material adverse impacttime and on our businessfinancial performance and results of operations.

outlook.

Risks Related to Regulatory Compliance and Legal Matters

Recent legislation

Legislation enacted in response to market and economic conditions may significantly affect our operations, financial condition and earnings.

Disruptions in the financial system during the past three years have resulted in significantly reduced business activity throughout the global and U.S. economies, which have the potential to significantly affect financial institutions.

The Dodd-Frank Act was enacted as a major reformatoryreform in response to thisthe financial crisis.crisis that began in the last decade. The Dodd-Frank Act increases regulation and oversight of the financial services industry, and imposes restrictions on the ability of institutions within the industry to conduct business consistent with historical practices, including aspects such as capital requirements, affiliate transactions, compensation, consumer protection regulations and mortgage regulation, among others. It is not clear what impact the Dodd-Frank Act and the numerous implementing regulations will ultimately have on the financial markets or on the U.S. banking and financial services industries and the broader U.S. and global economies. They may increase our costs of regulatory compliance and of doing business and otherwise affect our operations, and will likely result in additional costs and a diversion of management’s time from other business activities, any of which may adversely impact our results of operations, liquidity or financial condition. Theycondition.They also may significantly affect our business strategy, the markets in which we do business, the markets for and value of our investments and our ongoing operations, costs and profitability.

PAGE 17

Item 1A.  RISK FACTORS — continued

Our deposit insurance premiums have decreased but may increase in the future, which could have a material adverse impact on our future earnings and financial condition.

The FDIC insures deposits at FDIC-insured financialdepository institutions, including S&T Bank. The FDIC charges insured financialdepository institutions premiums to maintain the Deposit Insurance Fund, or DIF, at a specific level. The Bank’s FDIC insurance premiums recently decreased after substantial increases beginning in 2009, but we may pay significantly higher premiums in the future. Current economic conditions have increased bank failures and additional failures are expected, all of which decrease the DIF. The Dodd-Frank Act increased the minimum target DIF ratio from 1.15 percent of estimated insured deposits to 1.35 percent of estimated insured deposits. The FDIC must seek to achieve the 1.35 percent ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase.
The FDIC has issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher reserve ratio of 2 percent as a long-term goal beyond what is required by statute. There is no implementation deadline for the 2 percent ratio. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at or above the statutory target level.minimum target. Any increase in our FDIC premiums could have an adverse effect on the Bank’s profits and financial condition. Refer to Supervision and Regulation within Part I, Item 1 of this Report for additional information.

Future governmental regulation and legislation could limit our growth.

We are subject to extensive state and federal regulation, supervision and legislation that govern nearly every aspect of our operations. The regulations are primarily intended to protect depositors, customers and the banking system as a whole, not shareholders. Failure to comply with applicable regulations could lead to penalties and damage to our reputation. Furthermore, as shown through the Dodd-Frank Act, the regulatory environment is constantly undergoing change and the impact of changes to laws, the rapid implementation of regulations, the interpretation of such laws or regulations or other actions by existing or new regulatory agencies could make regulatory compliance more difficult or expensive, and thus could affect our ability to deliver or expand services, or it could diminish the value of our business. The ramifications and uncertainties of the recent increase in government intervention in the U.S. financial system could also adversely affect us. Refer to Supervision and Regulation within Part I, Item 1 of this reportReport for additional information.

Negative public opinion could damage our reputation and adversely impact our earnings and liquidity.

Reputational risk, or the risk to our business, earnings, liquidity and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues or inadequate protection of customer information. We are dependent on third-party providers for a number of services that are important to our business. Refer to the risk factor titled, “We rely on third-party providers and other suppliers for a number of services that are important to our business. An interruption or cessation of an important service by any third party could have a material adverse effect on our business” for additional information. A failure by any of these third-party service providers could cause a disruption in our operations, which could result in negative public opinion about us or damage to our reputation. We expend significant resources to comply with regulatory requirements, and the

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failure to comply with such regulations could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers and adversely impact our earnings and liquidity

liquidity.

We may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on our financial condition and results of operations.

From time to time, customers and others make claims and take legal action pertaining to the performance of our responsibilities. Additionally, the current economic downturn has resulted in higher customer defaults and a resultant increase in litigation. Whether customer claims and legal action related to the performance of our responsibilities are founded or unfounded, or if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant expenses,

PAGE 18

Item 1A.  RISK FACTORS — continued

attention from management and financial liability. Any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Risks Related to Liquidity
We rely on a stable core deposit base as our primary source of liquidity.
We are dependent for our funding on a stable base of core deposits. Our Business Strategy

Our strategy includes growth plans through organic growthability to maintain a stable core deposit base is a function of our financial performance, our reputation and acquisitions. Our financial condition and resultsthe security provided by FDIC insurance, which combined, gives customers confidence in us. If any of operationsthese items are damaged or come into question, the stability of our core deposits could be negatively affected ifharmed.

Our ability to meet contingency funding needs, in the event of a crisis that causes a disruption to our core deposit base, is dependent on access to wholesale markets, including funds provided by the FHLB of Pittsburgh.
We own stock in the Federal Home Loan Bank, or FHLB, in order to qualify for membership in the FHLB system, which enables us to borrow on our line of credit with the FHLB that is secured by a blanket lien on a significant portion of our loan portfolio. Changes or disruptions to the FHLB or the FHLB system in general may materially impact our ability to meet short and long-term liquidity needs or meet growth plans. Additionally, we fail to grow or fail to manage our growth effectively.

We intend to continue pursuing a growth strategy, which may include organic growth, expansion or acquisitions. We cannot assure yoube assured that wethe FHLB will be able to expandprovide funding to us when needed, nor can we be certain that the FHLB will provide funds specifically to us, should our market presence infinancial condition and/or our existing markets or successfully enter new markets or that any such expansion will not adversely affectregulators prevent access to our resultsline of operations. Failurecredit. The inability to manage our growth effectivelyaccess this source of funds could have a materialmaterially adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implementmeet our business strategy.customer’s needs. Our organic growth strategy includes an internal reorganization offinancial flexibility could be severely constrained if we were unable to maintain our business structure to a market-based approach from a product-based approach. There is no assurance that this internal reorganization will be successful, and if not executed as planned, it may adversely affect our results of operations.

Our failure to find suitable acquisition candidates, or successfully bid against other competitors for acquisitions, could adversely affect our ability to successfully implement our business strategy. If we are successful in acquiring other entities, the process of integrating such entities will divert significant management time and resources. We may not be able to integrate successfully or operate profitably any financial institutions we may acquire. We may experience disruption and incur unexpected expenses in integrating acquisitions. These failures could adversely impact our future prospects and results of operation.

We are subject to competition from both banks and non-banking companies.

The financial services industry is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area. Our principal competitors include commercial banks of all types, finance companies, credit unions, mortgage brokers, insurance agencies, trust companies and various sellers of investments and investment advice. Many of our non-bank competitors are not subject to the same degree of regulation as we are and have advantages over us in providing certain services. Additionally, many of our competitors are significantly larger than we are and have greater access to capital and other resources. Failurefunding or if adequate financing is not available at acceptable interest rates.

Risks Related to compete effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition and results of operations.

We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.

We are required by federal regulatory authorities to maintain adequate capital levels to support operations.Owning Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance and outlook. Pending regulatory changes, such as the Dodd-Frank Act, may require us to have more capital than was previously required. If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected.

PAGE 19

Item 1A.  RISK FACTORS — continued

The Warrant we issued to the U.S. TreasuryStock

Our outstanding warrant may be dilutive to holders of our common stock.

The ownership interest of the existing holders of our common stock may be diluted to the extent theour outstanding warrant we issued to the U.S. Treasury in connection with the sale to the U.S. Treasury of the Series A Preferred Stock is exercised. Although we redeemed all of the outstanding preferred stock previously issued to the U.S. Treasury, we did not repurchase the outstandingThe warrant and it will remain outstanding until 2019 or until we repurchase it.2019. The shares of common stock underlying the warrant represent approximately 1.801.71 percent of the shares of our common stock outstanding as of January 31, 20122015 (including the shares issuable upon exercise of the warrant in total shares outstanding). AlthoughThe warrant holder has the U.S. Treasury has agreed notright to vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction.

warrant.

Our ability to pay dividends on our common stock may be limited.

Holders of our common stock will be entitled to receive only such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce, suspend or eliminate our dividend at any time. Any decrease or elimination to the dividends on our common stock could adversely affect the market price of our common stock.

We may fail to realize all of the anticipated benefits of the acquisition of Mainline Bancorp, Inc.

The success of the merger with Mainline will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses of S&T and Mainline. However, to realize these anticipated benefits and cost savings, we must successfully combine our business and the businesses of Mainline. If we are not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all, or may take longer to realize than expected.

Item 1B.  UNRESOLVED STAFF COMMENTS

There are no unresolved SEC staff comments.


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Item 2.  PROPERTIES

We own a four-story building in Indiana, Pennsylvania, located at 800 Philadelphia Street, which serves as our headquarters and executive and administrative offices. Our Community Banking and Wealth Management and the executive office of the Insurance segmentsegments are also located at our headquarters. Additionally,In addition, we leaseown a building in Indiana, Pennsylvania that serves as additional administrative offices. We lease two buildings in Indiana, Pennsylvania; one that houses both our data processing and technology center as well as one of our branches and own a two-story building directly behind itone that serves as additional administrative offices.

houses our training center. Community Banking has 4958 locations, including 56 branches located in ninetwelve counties in Pennsylvania, of which 3240 are owned and 1716 are leased.leased, including the aforementioned building that shares space with our data center. The other two Community Banking alsolocations include two leased loan production offices in Ohio. We lease an office to our Insurance segment in Cambria County, Pennsylvania. The Insurance segment leases one additional office, to Insurance.and has staff located within the Community Banking offices in Indiana, Jefferson, Washington and Westmoreland counties. Wealth Management leases two offices, one office, located in Allegheny County, Pennsylvania and one in Westmoreland County, Pennsylvania. Wealth Management also has several staff located within the Community Banking offices to provide their services to our retail customers. InsuranceOur operating leases three offices located in three counties in Pennsylvania. Insurance also has three staff located withinand the Community Banking offices in Jefferson and Blair counties. The operating andone capital leaseslease for Community Banking, Wealth Management and Insurance expire at various dates through the year 2054 and generally include options to renew. For additional information regarding the lease commitments, refer to Part II, Item 8, Note 9 Premises and Equipment in the Notes to Consolidated Financial Statements, which is included in Item 8 of this Report.

PAGE 20

Statements.

Item 3.  LEGAL PROCEEDINGS

The nature of our business generates a certain amount of litigation involving matters arisingwhich arises in the ordinary course of business. However, in management’s opinion, there are no proceedings pending to whichthat we are a party or to whichor our property is subject which, if determined adversely to us,that would be material in relation to our shareholders’ equityfinancial condition or financial condition.results of operations. In addition, no material proceedings are pending nor are known to be threatened or contemplated against us by governmental authorities or other parties.


Item 4.  MINE SAFETY DISCLOSURES

Not applicable.

PAGE 21


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PART II


Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Prices and Dividend Information

Our common stock is listed on the NASDAQ Global Select Market System or NASDAQ, under the symbol STBA. The range of sale prices for the years 20112014 and 20102013 is set forthdetailed in the table below and is based upon information obtained from NASDAQ. As of the close of business on January 31, 2012,2015, we had 2,9903,041 shareholders of record. Dividends paid by S&T are primarily provided from S&T Bank’s dividends to S&T. The payment of dividends by S&T Bank to S&T is subject to the restrictions described in Part II, Item 8, Note 5 Dividend and Loan Restrictions of this Report. The cash dividends declared per share are shown below.

   Price Range of
Common Stock		   Cash
Dividends
Declared		 
2011  Low   High   

Fourth quarter

  $15.21    $20.67    $0.15  

Third quarter

   15.21     19.46     0.15  

Second quarter

   16.65     22.23     0.15  

First quarter

   20.90     23.86     0.15  
2010               

Fourth quarter

  $17.00    $23.91    $0.15  

Third quarter

   16.64     22.29     0.15  

Second quarter

   19.52     25.84     0.15  

First quarter

   15.75     22.22     0.15  

PAGE 22

 
Price Range of
Common Stock
 
Cash
Dividends
Declared

2014Low
 High
 
Fourth quarter$23.07
 $29.28
 $0.18
Third quarter23.26
 25.86
 0.17
Second quarter22.21
 25.20
 0.17
First quarter21.17
 25.43
 0.16
2013     
Fourth quarter$23.18
 $26.41
 $0.16
Third quarter19.74
 24.98
 0.15
Second quarter17.14
 19.98
 0.15
First quarter17.24
 18.98
 0.15
Certain information relating to securities authorized for issuance under equity compensation plans is set forth under the heading Equity Compensation Plan Information Update in Part III, Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES – continued

12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Five-Year Cumulative Total Return

The following chart compares the cumulative total shareholder return on our common stock with the cumulative total shareholder return of the NASDAQ Composite Index(1) and NASDAQ Bank Index(1)(2) assuming a $100 investment in each on December 31, 2006.2009.

      Period Ending 
Index      12/31/06   12/31/07   12/31/08   12/31/09   12/31/10   12/31/11 

S&T Bancorp, Inc.

    $100.00    $82.81    $110.45    $54.95    $75.15    $67.03  

NASDAQ Composite

     100.00     110.66     66.42     96.54     114.06     113.16  

NASDAQ Bank

     100.00     80.09     62.84     52.60     60.04     53.74  



16
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Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES -- continued


 Period Ending
Index12/31/2009
 12/31/2010
 12/31/2011
 12/31/2012
 12/31/2013
 12/31/2014
S&T Bancorp, Inc.100.00
 136.75
 121.99
 116.45
 167.83
 203.26
NASDAQ Composite100.00
 118.14
 117.20
 137.98
 193.39
 222.02
NASDAQ Bank100.00
 117.98
 102.18
 121.26
 171.81
 180.25
(1)

(1)The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
(2)The NASDAQ Bank Index contains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as Banks. These companies include banks providing a broad range of financial services, including retail banking, loans and money transmissions.

PAGE 23



Item 6.  SELECTED FINANCIAL DATA

The tables below summarize selected consolidated financial data as of the dates or for the periods indicatedpresented and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and the Consolidated Financial Statements and NotesSupplementary Data in Part II, Item 8 of this Report.

CONSOLIDATED BALANCE SHEETS

December 31  2011   2010   2009   2008   2007 
(in thousands)                    

Total assets

  $4,119,994    $4,114,339    $4,170,475    $4,438,368    $3,407,621  

Securities available-for-sale

   357,596     288,025     354,860     452,713     358,822  

Goodwill

   165,273     165,273     165,167     163,546     50,087  

Net loans

   3,083,768     3,312,540     3,344,827     3,526,027     2,762,594  

Total deposits

   3,335,859     3,317,524     3,304,541     3,228,416     2,621,825  

Securities sold under repurchase agreements and federal funds purchased

   30,370     40,653     44,935     113,419     100,258  

Short-term borrowings

   75,000     —     51,300     308,475     80,000  

Long-term borrowings

   31,874     29,365     85,894     180,331     201,021  

Junior subordinated debt securities

   90,619     90,619     90,619     90,619     25,000  

Preferred stock, series A

   —     106,137     105,370     —     —  

Total shareholders’ equity

   490,526     578,665     553,318     448,694     337,560  

 December 31,
(dollars in thousands)2014
 2013
 2012
 2011
 2010
Total assets$4,964,686
 $4,533,190
 $4,526,702
 $4,119,994
 $4,114,339
Securities available-for-sale, at fair value640,273
 509,425
 452,266
 356,371
 286,887
Loans held for sale2,970
 2,136
 22,499
 2,850
 8,337
Portfolio loans, net of unearned income3,868,746
 3,566,199
 3,346,622
 3,129,759
 3,355,590
Goodwill175,820
 175,820
 175,733
 165,273
 165,273
Total deposits3,908,842
 3,672,308
 3,638,428
 3,335,859
 3,317,524
Securities sold under repurchase agreements30,605
 33,847
 62,582
 30,370
 40,653
Short-term borrowings290,000
 140,000
 75,000
 75,000
 —
Long-term borrowings19,442
 21,810
 34,101
 31,874
 29,365
Junior subordinated debt securities45,619
 45,619
 90,619
 90,619
 90,619
Preferred stock, series A—
 —
 —
 —
 106,137
Total shareholders’ equity$608,389
 $571,306
 $537,422
 $490,526
 $578,665

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Item 6.  SELECTED FINANCIAL DATA -- continued


CONSOLIDATED STATEMENTS OF NET INCOME
 Years Ended December 31,
(dollars in thousands)2014
 2013
 2012
 2011
 2010
Interest income$160,523
 $153,756
 $156,251
 $165,079
 $180,419
Interest expense12,481
 14,563
 21,024
 27,733
 34,573
Provision for loan losses1,715
 8,311
 22,815
 15,609
 29,511
Net Interest Income After Provision for Loan Losses146,327
 130,882
 112,412
 121,737
 116,335
Noninterest income46,338
 51,527
 51,912
 44,057
 47,210
Noninterest expense117,240
 117,392
 122,863
 103,908
 105,633
Net Income Before Taxes75,425
 65,017
 41,461
 61,886
 57,912
Provision for income taxes17,515
 14,478
 7,261
 14,622
 14,432
Net Income$57,910
 $50,539
 $34,200
 $47,264
 $43,480
Preferred stock dividends and discount amortization—
 —
 —
 7,611
 6,201
Net Income Available to Common Shareholders$57,910
 $50,539
 $34,200
 $39,653
 $37,279

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Item 6.  SELECTED FINANCIAL DATA -- continued


SELECTED PER SHARE DATA AND RATIOS
Refer to page 65 Explanation of Use of Non-GAAP Financial Measures for a discussion of common return on average tangible assets, common return on average tangible common equity and the ratio of tangible common equity to tangible assets as non-GAAP financial measures.

Years Ended December 31  2011   2010   2009  2008   2007 
(in thousands, except per share data)                   

Interest income

  $165,079    $180,419    $195,087   $216,118    $215,605  

Interest expense

   27,733     34,573     49,105    72,171     99,167  

Provision for loan losses

   15,609     29,511     72,354    12,878     5,812  

Net Interest Income After Provision for Loan Losses

   121,737     116,335     73,628    131,069     110,626  

Noninterest income

   44,057     47,210     38,580    37,452     40,605  

Noninterest expense

   103,908     105,633     108,126    83,801     73,460  

Income Before Taxes

   61,886     57,912     4,082    84,720     77,771  

Provision (benefit) for income taxes

   14,622     14,432     (3,869)   24,517     21,627  

Net Income

   47,264     43,480     7,951    60,203     56,144  

Preferred stock dividends and discount amortization

   7,611     6,201     5,913    —     —  

Net Income Available to Common Shareholders

  $39,653    $37,279    $2,038   $60,203    $56,144  

Per Share Data

                        

Earnings per common share—basic

  $1.41    $1.34    $0.07   $2.30    $2.27  

Earnings per common share—diluted

   1.41     1.34     0.07    2.28     2.26  

Dividends declared per common share

   0.60     0.60     0.61    1.24     1.21  

Common book value

   17.44     16.91     16.14    16.24     13.75  

PAGE 24

 December 31,
 2014
 2013
 2012
 2011
 2010
Per Share Data         
Earnings per common share—basic$1.95
 $1.70
 $1.18
 $1.41
 $1.34
Earnings per common share—diluted1.95
 1.70
 1.18
 1.41
 1.34
Dividends declared per common share0.68
 0.61
 0.60
 0.60
 0.60
Dividend payout ratio34.89% 35.89% 50.75% 42.44% 44.75%
Common book value$20.42
 $19.21
 $18.08
 $17.44
 $16.91
Profitability Ratios         
Common return on average assets1.22% 1.12% 0.79% 0.97% 0.90%
Common return on average tangible assets (non-GAAP)1.28% 1.19% 0.85% 1.04% 0.98%
Common return on average equity9.71% 9.21% 6.62% 6.78% 6.58%
Common return on average tangible common equity (non-GAAP)14.02% 13.94% 10.35% 12.89% 13.28%
Capital Ratios         
Common equity/assets12.25% 12.60% 11.87% 11.91% 11.48%
Tangible common equity / tangible assets (non-GAAP)9.00% 9.03% 8.24% 8.14% 7.67%
Tier 1 leverage ratio9.80% 9.75% 9.31% 9.17% 11.07%
Risk-based capital—tier 112.34% 12.37% 11.98% 11.63% 13.28%
Risk-based capital—total14.27% 14.36% 15.39% 15.20% 16.68%
Asset Quality Ratios         
Nonaccrual loans/loans0.32% 0.63% 1.63% 1.79% 1.90%
Nonperforming assets/loans plus OREO0.33% 0.64% 1.66% 1.92% 2.07%
Allowance for loan losses/loans1.24% 1.30% 1.38% 1.56% 1.53%
Allowance for loan losses/nonperforming loans385% 206% 85% 87% 80%
Net loan charge-offs/average loans0.00% 0.25% 0.78% 0.56% 1.11%

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RECONCILIATIONS OF GAAP TO NON-GAAP RATIOS
 December 31
(dollars in thousands)2014
 2013
 2012
 2011
 2010
Common return on average tangible assets (non-GAAP)         
Net income$57,910
 $50,539
 $34,200
 $39,653
 $37,279
Plus: amortization of intangibles net of tax734
 1,034
 1,111
 1,129
 1,265
Net income before amortization of intangibles58,644
 51,573
 35,311
 40,782
 38,544
Total average assets (GAAP Basis)4,762,363
 4,505,792
 4,312,538
 4,072,608
 4,123,455
Less: average goodwill and average other intangible assets, net of deferred tax liability(177,881) (178,757) (175,501) (169,541) (170,716)
Tangible average assets (non-GAAP)$4,584,482
 $4,327,035
 $4,137,037
 $3,903,067
 $3,952,739
Common return on average tangible assets (non-GAAP)1.28% 1.19% 0.85% 1.04% 0.98%
Common return on average tangible common equity (non-GAAP)         
Net income$57,910
 $50,539
 $34,200
 $39,653
 $37,279
Plus: amortization of intangibles net of tax734
 1,034
 1,111
 1,129
 1,265
Net income before amortization of intangibles58,644
 51,573
 35,311
 40,782
 38,544
Total average shareholders’ equity (GAAP Basis)596,155
 548,771
 516,812
 585,186
 566,670
Less: average goodwill, average other intangible assets and average preferred equity, net of deferred tax liability(177,881) (178,757) (175,501) (268,755) (276,470)
Tangible average common equity (non-GAAP)$418,274
 $370,014
 $341,311
 $316,431
 $290,200
Common return on average tangible common equity (non-GAAP)14.02% 13.94% 10.35% 12.89% 13.28%
Tangible common equity/tangible assets (non-GAAP)         
Total shareholders' equity (GAAP basis)$608,389
 $571,306
 $537,422
 $490,526
 $578,665
Less: goodwill and other intangible assets and preferred equity, net of deferred tax liability(177,530) (178,264) (179,211) (168,996) (276,262)
Tangible common equity (non-GAAP)430,859
 393,042
 358,211
 321,530
 302,403
Total assets (GAAP basis)4,964,686
 4,533,190
 4,526,702
 4,119,994
 4,114,339
Less: goodwill and other intangible assets and preferred equity, net of deferred tax liability(177,530) (178,264) (179,211) (168,996) (170,126)
Tangible assets (non-GAAP)$4,787,156
 $4,354,926
 $4,347,491
 $3,950,998
 $3,944,213
Tangible common equity/tangible assets (non-GAAP)9.00% 9.03% 8.24% 8.14% 7.67%

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section reviews our financial condition for each of the past two years and results of operations for each of the past three years. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. Some tables may include additional time periods to illustrate trends within our financial statements.Consolidated Financial Statements. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.


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Important Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to” or other similar words. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those identified under Risk Factors in Part I, Item 1A of this Report, the documents incorporated by reference or other important factors disclosed in this reportReport and from time to time in our other filings with the Securities and Exchange Commission, or SEC. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to us at that time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

These forward-looking statements are based on current expectations, estimates and projections about our business management’sand beliefs and assumptions made by management. These Future Factors are not guarantees of our future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements.

Future Factors include:

changescredit losses;

cyber-security concerns, including an interruption or breach in the security of our information systems;
rapid technological developments and changes;
sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve;
a change in spreads on interest-earning assets and interest-bearing liabilities, the shape of the yield curveliabilities;
regulatory supervision and interest rate sensitivity;

oversight, including Basel III required capital levels, and public policy changes, including environmental regulations;

a prolonged period of low interest rates;

credit losses;

access to capital in the amounts, at the times and on the terms required to support our future businesses;

legislation affecting the financial services industry as a whole, and/or S&T Bancorp, Inc., or S&T Bank, in particular, including the effects of the Dodd-Frank Act;

regulatory supervisionthe outcome of pending and oversight, including required capital levels,future litigation and public policy changes, including environmental regulations;

governmental proceedings;

increasing price and product/service competition, including new entrants;

rapid technological developments and changes;

the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

continued deterioration of the housing market and reduced demand for mortgages;

containing costs and expenses;

reliance on large customers;

the outcome of pending and future litigation and governmental proceedings;

managing our internal growth and acquisitions;

containing costs and expenses;

reliance on significant customer relationships;
the possibility that the anticipated benefits from our proposed acquisition of Mainlineacquisitions cannot be fully realized in a timely manner or at all, or that integrating thefuture acquired operations will be more difficult, disruptive or costly than anticipated;

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

general economic or business conditions, either nationally or regionally in western Pennsylvania and our other market areas, may be less favorable than expected, resulting in among other things, a reduced demand for credit and other services;

deterioration of the housing market and reduced demand for mortgages;

a declinedeterioration in market capitalization to common book value, whichthe 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

a continuationreemergence of recent 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.

generally; and

access to capital in the amounts, at the times and on the terms required to support our future businesses.

These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic conditions, including interest rate and currency exchange rate fluctuations, and other Future Factors.


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Critical Accounting Policies and Estimates

Our financial statementsConsolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.Notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies inherently are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported.

Our most significant accounting policies are presented in Part II, Item 8, Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which are included in Item 8 of this Report. These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the Consolidated Financial Statements and how those values are determined.

We view critical accounting policies to be those which are highly dependent on subjective or complex estimates, assumptions and judgments and where changes in those estimates and assumptions could have a significant impact on the Consolidated Financial Statements. We currently view the determination of the allowance for loan losses, or ALL, income taxes, securities valuation and goodwill and other intangible assets to be critical accounting policies.

During 2014, we did not significantly change the manner in which we applied our critical accounting policies or developed related assumptions or estimates. We have reviewed these related critical accounting estimates and related disclosures with the Audit Committee.

Allowance for Loan Losses

Our loan portfolio is our largest category of assets on our Consolidated Balance Sheets. Accordingly, weWe have designed a systematic ALL methodology which is used to determine our provision for loan losses and ALL on a quarterly basis. The ALL represents management’s estimate of probable losses inherent in the loan portfolio at the balance sheet date and is presented as a reserve against loans in the Consolidated Balance Sheets. The ALL is increased by a provision charged to expense and reduced by charge-offs, net of recoveries. Determination of an adequate ALL is inherently subjective as it requires estimations of the occurrence of future events, as well as the timing of such events. The ALLand 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.

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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 a creditorwe will be unable to collect all amounts due according to the contractual terms of the loan agreement. For all troubled debt restructurings, or 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. Specific reserves are established based upon the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate, 2) the loan’s observable market price or 3) the estimated fair value of the collateral if the loan is collateral dependent. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific impaired loans, including estimating the amount and timing of future cash flows, the current estimated fair value of the loan and collateral values. Our impairment evaluations consist primarily of the fair value of collateral method sincebecause most of our loans are collateral dependents.

dependent. We obtain appraisals annually on impaired loans greater than $0.5 million.

The ALL methodology for groups of homogeneous loans, known as the general reserve or reserve for loans collectively evaluated for impairment, is comprised of both a quantitative and qualitative analysis. We first apply historical loss rates to pools of loans with similar risk characteristics. The historical lossLoss rates are calculated byusing historical charge-offs that have occurred within each pool of loans over the loss emergence period.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. In general, the LEP will be shorter in an economic slowdown or recession and longer during times of economic stability or growth, as customers are better able to delay loss confirmation after a potential loss event has occurred.
In conjunction with our annual review of the ALL assumptions, we have updated our study of LEPs for our commercial portfolio segments using our loan charge-off history. Our study showed that the LEP for our Commercial Construction portfolio has lengthened and that our current estimated LEPs for the commercial real estate, or CRE, and commercial and industrial, or C&I, portfolio segments did not materially change. We estimate the loss emergence periodLEP to be two3.5 years for CRE and commercial construction and 2.5 years for C&I. This is an increase from the prior LEPs of 1.5 years for commercial real estate loansconstruction. We believe that the LEPs for the consumer portfolio segments have also lengthened as they are influenced by the same improvement in economic conditions that has impacted the commercial portfolio segments over the past two years. We therefore also lengthened the LEP assumption for the consumer portfolio to two years. This is an increase from prior LEPs of one and a half years for the consumer portfolio segment.

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Another key assumption is the look-back period, or LBP, which represents the historical data period utilized to calculate loss rates. We lengthened the LBP for C&I, commercial construction and the consumer loan portfolio segments in order to capture relevant historical data believed to be reflective of losses inherent in the portfolios. We use a five and one yearquarter years LBP for all other loanour commercial portfolio segments and a three and one quarter years LBP for our consumer portfolio segments.
After consideration of the historic loss calculations, management applies additional qualitative adjustments so that the ALL is reflective of the inherent losses that exist in the loan portfolio at the balance sheet date. Qualitative adjustments are made based upon changes in economic conditions, loan portfolio and asset quality data and credit process changes, such as credit policies or underwriting standards. The evaluation of the various components of the ALL requires considerable judgment in order to estimate inherent loss exposures.

We enhanced our

The changes made to the ALL modelassumptions were applied prospectively and did not result in a material change to the fourth quarter of 2010 to better align it withtotal ALL. Lengthening the regulatory guidance. The calculationLEP does increase the historical loss rates and therefore the quantitative component of the base historical loss utilizing an average method over the prior five years was shortened to include a one to two year loss emergence period depending on the loan category over a rolling four quarter average. Loss emergence refers to the length of time between a loss event and a charge-off of the loan. With the volatility in the credit cycle at that time, the shorter time horizon was more responsive to the loss emergence periods we were experiencing in our portfolio.ALL. We believe this shorter time horizon provides a better indicationmakes the quantitative component of the ALL more reflective of inherent losses inthat exist within the loan portfolio, given the recent economic downturn. We also refinedwhich resulted in a decrease in the qualitative factors beginning in the fourth quarter of 2010 to better align with the regulatory guidance. Qualitative factors became a basis point adjustment applied to the historical base loss. The combinationcomponent of the enhancements to the average method and the qualitative factors did not materially change theALL. The ALL at December 31, 2010, resulting in an increase in2014 reflects these changes within the ALL of less than $0.5 million. Since December 31, 2010, there have been no further enhancements to the ALL methodology.

C&I, commercial construction and consumer portfolio segments.

At December 31, 2011,2014, approximately 9283 percent of the ALL related to the commercial loan portfolio. Commercial loans represent 7375 percent of total portfolio loans. Commercial loans have been more impacted by the economic slowdown in our markets. The ability of customers to repay commercial loans is more dependent upon the success of their business,businesses, continuing income and general economic conditions. Accordingly, theThe risk of loss is higher on such loans compared to consumer loans, which have incurred lower losses in our market.

There are many

Our ALL Committee meets quarterly to verify the overall adequacy of the ALL. Additionally, on an annual basis, the ALL Committee meets to validate our ALL model. This validation includes reviewing the pools of loans to ensure the segmentation results in relevant homogeneous pools of loans. The ALL Committee reviews the LEP and LBP used to calculate the loss rates. Further, the ALL Committee reviews the qualitative factors affectingto ensure that both the ALL; some are quantitative, while others requirecategories and the range of qualitative judgment. adjustments remain appropriate. As a result of this ongoing monitoring process, we may make changes to our ALL methodology to be responsive to the economic environment.
Although we believe our process for determining the ALL adequately considers all of the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ fromlosses are higher than management estimates, additional provisions for loan losses could be required and could adversely affect our earnings or financial position in future periods.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

Income Taxes

We estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business. The laws are complex and subject to different interpretations by the taxpayerus and various taxing authorities. On a quarterly basis, we assess the reasonableness of our effective tax rate based upon our current estimate of the amount and components of netpre-tax income, tax credits and the applicable statutory tax rates expected for the full year.

Deferred

We determine deferred income tax assets and liabilities are determined using the asset and liability method, and are reportedwe report them in other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and recognizes enacted changes in tax rate and laws. When deferred tax assets are recognized, they are subject to a valuation allowance based on Management’smanagement’s judgment as to whether realization is more likely than not.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets. We evaluate and assess the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintain tax accruals consistent with the evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance. These changes, when they occur, can affect deferred taxes and accrued taxes, as well as the current period’s income tax expense and can be significant to our operating results.

Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.


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Securities Valuation

We determine the appropriate classification of securities at the time of purchase. All securities, including both debt and equity securities, are classified as available-for-sale. These securities are carried at fair value with net unrealized gains and losses deemed to be temporary and are reported separately as a component of other comprehensive income (loss), net of tax. Realized gains and losses on the sale of available-for-sale securities and other-than-temporary impairment, or OTTI, charges are recorded within noninterest income in the Consolidated Statements of Net Income. Realized gains and losses on the sale of securities are determined using the specific-identification method.

We perform a quarterly review of our securities to identify those that may indicate an OTTI. Our policy for OTTI within the marketable equity securities portfolio generally requires an impairment charge when the security is in a loss position for 12 consecutive months, unless facts and circumstances would suggest the need for an OTTI prior to that time. Our policy for OTTI within the debt securities portfolio is based upon a number of factors, including but not limited to, the length of time and extent to which the estimated fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the best estimate of the impairment charge representing credit losses, the likelihood of the security’s ability to recover any decline in its estimated fair value and whether we intend to sell the investment security or if it is more likely than not that we will be required to sell the security prior to the security’s recovery. If the impairment is considered other-than-temporary based on management’s review, the impairment must be separated into credit and non-credit portions. The credit component is recognized in the Consolidated Statements of Net Income and the non-credit component is recognized in other comprehensive income (loss), net of applicable taxes. If the financial markets experience deterioration, charges to income could occur in future periods.

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Goodwill and Other Intangible Assets

As a result of acquisitions, we have recorded goodwill and identifiable intangible assets onin our balance sheet.Consolidated Balance Sheets. Goodwill represents the excess of the purchase price over the fair value of net assets purchased.

acquired. We account for business combinations using the acquisition method of accounting.

Goodwill relates to value inherent in the Community Banking and Insurance reporting units and thethat value is dependent upon our ability to provide quality, cost-effective services in the face of competition from other market participants. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of our services. As such, goodwill value is supported ultimately by revenueprofitability that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill, which could adversely impact our earnings in future periods.

We have three reporting units including:units: Community Banking, Insurance and Wealth Management and Insurance.Management. The carrying value of goodwill is tested annually for impairment each October 11st or more frequently if indicatorsit is determined that a triggering event has occurred. We first assess qualitatively whether it is more likely than not that the fair value of impairment are present.a reporting unit is less than its carrying amount. Our qualitative assessment considers such factors as macroeconomic conditions, market conditions specifically related to the banking industry, our overall financial performance and various other factors. If we determine that it is more likely than not that the fair value is less than the carrying amount, we proceed to test for impairment. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed andthat could result in impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied value of goodwill of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess. We completed the annual goodwill impairment assessment as required in 2011, 20102014, 2013 and 2009;2012; the results indicated that the fair value of each reporting unit exceeded theirthe carrying value.

During the third quarter of 2011,

Based upon our stock traded below common book valuequalitative assessment performed for an extended period of time. As a result,our annual impairment analysis, we engaged a third party to provide current market data for recent bank merger and acquisition transactions. The market data included transactions from January 2010 to August 2011 and indicatedconcluded that transactions were occurring in excess of common book value of 70.3 percent (median). This data supported our conclusionit is more likely than not that the fair value of the reporting units exceeds the carrying value. Both the national economy and the local economies in our markets have stabilized. General economic activity and key indicators such as housing and unemployment continue to show improvement. While still challenging, the banking environment continues to improve with fewer bank failures, better asset quality, improved earnings and generally better stock prices. Activity in mergers and acquisitions demonstrated that there is premium value of banking franchises and no further valuation procedures were completed. At December 31, 2011,a number of banks of our size have been able to access the capital markets over the past year. Our stock price has increased, and our stock was trading in excesshas traded above book value throughout 2014. Additionally, our overall performance has improved, and we have not identified any other facts or circumstances that would cause us to conclude that it is more likely than not that the fair value of 10 percent above common book value.

each of the reporting units would be less than the carrying value of the reporting unit.

We determine the amount of identifiable intangible assets based upon independent core deposit and insurance contract analysesvaluations at the time of acquisition. Intangible assets with finite useful lives, consisting primarily of core deposit and customer

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list intangibles, are amortized using straight-line or accelerated methods over their estimated weighted average useful lives, ranging from 10 to 16 years. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No such events or changes in circumstances occurred during the years ended December 31, 2011, 20102014, 2013 and 2009.

2012.

The financial services industry and securities markets continue tocan be adversely affected by declining values of nearly all asset classes.values. If current economic conditions continue to result in a prolonged period of economic weakness in the future, our business segments, including the Community Banking segment, may be adversely affected. This may result in impairment of goodwill and other intangible assets in the future. Any resulting impairment loss could have a material adverse impact on our financial condition and its results of operations.

In the event that we determine that either our goodwill or finite lived intangible assets are impaired, recognition of an impairment charge could have a significant adverse impact on our financial position or results of operations in the period in which the impairment occurred.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

occurs.

Recent Accounting Pronouncements and Developments

Note 1 Summary of Significant Accounting Policies Recently Adopted Accounting Standards Updates and Recently Issued Accounting Standards Updates in the Notes to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Report, discusses new accounting pronouncements that we adopted and the expected impact of accounting pronouncements recently issued or proposed, but not yet required to be adopted.

Executive Overview

We are a bank holding company headquartered in Indiana, Pennsylvania with assets of $4.1$5.0 billion at December 31, 2011.2014. We provide a full range of financial services through offices located in Allegheny, Armstrong, Blair, Butler, Cambria, Clarion, Clearfield, Indiana, Jefferson and Westmoreland12 Pennsylvania counties of Pennsylvania. We provide full servicewith retail and commercial banking products, as well as cash management services, insurance, estate planningtrust and administration, employee benefit plan investment management and administration, corporatebrokerage services and other fiduciary services.insurance. We also have two loan production offices, or LPOs, in northeast and central Ohio. Our common stock trades on the NasdaqNASDAQ Global Select Market under the symbol “STBA.”

We earn revenue primarily from interest on loans and securities investments and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provision for loan losses and other operating costs such as:as salaries and employee benefits, occupancy, data processing, expensesoccupancy and tax expense.

Our mission is to become the financial services provider of choice in western Pennsylvaniawithin the markets that we serve. We strive to do this by delivering exceptional service and value, one customer at a time. Our strategic plan is market based and focuses on satisfying the needsorganic growth, which includes growth within our current footprint and growth through market expansion. We also actively evaluate acquisition opportunities that, if successful, can be another source of our customers, including: transaction, credit, investment and insurance needs. Transaction needs include the traditional banking needs for both individuals and businesses. Credit needs are solutions for customers with the need to borrow for personal assets, business growth and expansion, or capital leverage. Investments needs are a customer’s needs as it relates to deriving growth and return including our investment services through S&T Wealth Management Services and Stewart Capital Advisors. Insurance needs include S&T–Evergreen Insurance LLC and S&T Insurance Group, LLC, which provides a host of insurance products and services for both individuals and businesses.growth. Our strategic plan includes a collaborative model that combines expertise from all of our business segments and focuses on achievingsatisfying each customer’s individual financial objectivesobjectives.
During 2014, we successfully executed on our organic growth strategy through eachgrowth in our current footprint and by expanding into new markets. We opened an LPO in central Ohio on March 24, 2014. On June 18, 2014, we opened a new branch with a team of experienced banking professionals in State College, Pennsylvania. most recently, on January 14, 2015, we announced our planned expansion into western New York. During 2014, we grew our business organically with portfolio loans increasing $302.5 million, or 8.5 percent, compared to December 31, 2013. Our expansion into Ohio, with the establishment of two LPOs, has been very successful and contributed approximately $146.0 million, or
48 percent, of our delivery channels.

We continued to make progress throughout 2011 and are pleased to report positive trendstotal loan growth in all2014. Further driving loan growth was the expansion of our operations. Our major accomplishments included:

sales team with the addition of commercial lenders in various markets throughout 2014.

On December 7, 2011October 29, 2014, we redeemed all of the $108.7 million of Series A Preferred Stock issued on January 16, 2009 in conjunction with our participation in the U.S. Treasury Capital Purchase Program, or CPP. Our strong capital position allowed us to repurchase the preferred stock without raising additional capital. Upon redemption, a one-time non-cash reduction to net income available to common shareholders of $1.8 million, or $0.06 per common share, was recorded for the remaining unamortized discount of the preferred stock. The repayment of the CPP funds will save us $6.2 million in preferred dividends and amortization, or approximately $0.22 per common diluted share, on an annual basis beginning in 2012.

We are expanding our community banking network throughentered into a definitive agreement to acquire Mainline, a community bankIntegrity Bancshares, Inc., or Integrity, based in Ebensburg, Pennsylvania withCamp Hill, Pennsylvania. Integrity had approximately $236$844.0 million in assets. We believe thisassets at December 31, 2014 and maintains eight branches across four counties. The acquisition fits strategically withwill expand our operations, culturefootprint into south-central Pennsylvania. The transaction was valued at approximately $155.0 million and geographic perspective. Mainline operates seven branches in Cambria County, where our presence has been very limited, and one branch in Altoona, which will enhance our position in the Blair county marketplace. We expect the transactionis expected to be completedclose in the first quarter of

2015 after satisfaction of customary closing conditions. As soon as practicable following the merger, Integrity Bank, a Pennsylvania state-chartered bank subsidiary of Integrity, will be merged with and into S&T Bank with S&T Bank continuing as the surviving bank. The bank merger is expected to close in the second quarter of 2015. However, for a period of at least three years following the merger, S&T Bank intends to operate bank branches in the markets currently served by Integrity Bank using the name "Integrity Bank - A Division of S&T Bank".

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Net income for 2014 increased $7.4 million, or 14.6 percent, to $57.9 million, or $1.95 per diluted share, compared to $50.5 million, or $1.70 per diluted share for 2013. Return on average assets increased 10 basis points to 1.22 percent compared to 1.12 percent for 2013 and return on average equity increased 50 basis points to 9.71 percent compared to 9.21 percent for 2013. The improvement in earnings was primarily due to an increase in net interest income of $8.8 million, or 6.4 percent, and a decrease in the provision for loan losses of $6.6 million, or 79 percent. The increase in net interest income was primarily due to strong average loan growth of $259.3 million during 2014 and lower funding costs. Net interest margin, on a FTE basis, was unchanged at 3.50 percent for both 2014 and 2013. The provision for loan losses decreased due to a significant improvement in asset quality with only $0.1 million in net charge-offs in 2014. Despite significant growth in 2014, expenses remained well controlled with a decrease of $0.2 million. Our success in 2014 was a result of our ability to execute on our key strategic initiatives of loan growth, improving asset quality and expense control.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued

2012 pending the approval of the shareholders of Mainline and satisfaction of other customary closing conditions. We believe the merger will be accretive to earnings per share in the first year of operations, excluding one-time costs. Our first quarter of 2012 earnings will be negatively impacted by one-time merger related costs.

Efficiency continues


Asset quality continued to be our priority and we had several initiativesimprove throughout the year. As regulatory costs increased, we increased our focus on the cost benefit of electronic banking products and delivery channels, now utilized by approximately 60 percent of our customer base. We not only launched new online and mobile banking products, but we also made2014 resulting in a concerted effort to shift our customers from paper to electronic statements. As a result, about 47 percent are now receiving e-statements and the savings for us are significant. We also implemented a fee for paper statements in August of 2011. Further, based on our activity levels within our community banking network, we consolidated two branch offices during 2011.

Our earnings increased 6 percent to $39.7$6.6 million, or $1.41 per share in 2011 compared to $37.3 million or $1.34 per share in the previous year. The primary driver of our improved performance was stabilizing asset quality. Net charge-offs and nonperforming assets decreased in 2011, resulting in a79 percent, decline in the provision for loan losses of $13.9from the prior year. Net charge-offs decreased $8.5 million to only $0.1 million from the prior year. Nonperforming assets totaled $60.1Total nonperforming loans were $12.5 million, or 1.920.32 percent of total loans, plus other real estate owned, or OREO, at December 31, 2011, as compared to $69.72014, which represents a 45 percent decrease from $22.5 million, or 2.070.63 percent of total loans at December 31, 2010. The2013. Special mention and substandard loans also decreased $49.1 million, or 26 percent, to $138.6 million from $187.7 million at December 31, 2013. This significant improvement in asset quality was due to the continued improvement of the economic conditions in our markets and a strategic focus on actively managing and bringing to resolution our problem loans.

Our focus continues to be on loan and deposit growth and implementing opportunities to increase fee income while maintaining a strong expense discipline. The low interest rate environment will continue to challenge our net interest income, but our organic growth will help to mitigate the impact. We plan to evaluate new markets and strive to replicate the success of our LPOs in northeast and central Ohio. Our focus is also on maintaining and attracting new sales personnel to execute on our loan and fee growth strategies. Our capital position remains strong and we are well positioned to take advantage of acquisition opportunities as they arise.

Results of Operations
Year Ended December 31, 2014
Earnings Summary
Net income available to common shareholders increased $7.4 million, or 14.6 percent, to $57.9 million or $1.95 per share in 2014 compared to $50.5 million or $1.70 per share in 2013. The increase in net income was primarily due to an increase in net interest income of $8.8 million, or 6.4 percent and a $6.6 million, or 79 percent, decrease in the provision for loan losses.
Net interest income increased $8.8 million, or 6.4 percent, to $148.0 million compared to $139.2 million in 2013. The increase in net interest income is mainly due to interest earning asset growth and lower funding costs. Total average interest earning assets increased $275.5 million, or 6.7 percent, compared to 2013. The increase was driven by higher average loans, which is due to our successful efforts in growing our loan portfolio organically over the past year. Net interest margin, on a stabilizing economy, proactiveFTE basis, was unchanged at 3.50 percent for both 2014 and 2013.
The provision for loan losses decreased $6.6 million, or 79 percent, to $1.7 million during 2014 compared to $8.3 million in 2013. The lower provision for loan losses was due to improving economic conditions in our markets which have positively impacted our asset quality metrics in all categories, including decreases in loan charge-offs, nonaccrual loans, special mention and substandard loans and the delinquency status of our loan portfolio. Net loan charge-offs were only $0.1 million for 2014 compared to $8.5 million in 2013.
Total noninterest income decreased $5.2 million, or 10.1 percent, to $46.3 million for 2014 compared to $51.5 million for 2013. The decrease in noninterest income was primarily related to a $3.1 million gain on the sale of our merchant card servicing business that occurred in 2013. Mortgage banking income decreased $1.2 million, or 57 percent, due to higher interest rates in 2014 compared to 2013, resulting in a decrease in the volume of loans being originated and sold. Interest rate swap fees with our commercial customers decreased $0.6 million, or 57 percent, due to a decline in customer demand for this product. These decreases were partially offset by an increase in our wealth management fees of $0.6 million, or 6 percent, due to new business development efforts and certain fee increases.
Total noninterest expense decreased $0.2 million to address problem credits$117.2 million for 2014 compared to $117.4 million for 2013. Despite significant growth in 2014, expenses were well controlled. Notable declines were a decrease of $2.1 million for pension expense resulting from a change in actuarial assumptions used to calculate our pension liability and disciplined underwriting standardsa $0.8 million decrease in other taxes due to legislative changes that resulted in a stronger loan portfolio. We did experience a declinereduction in our net interestPennsylvania shares tax. These decreases were offset by relatively small increases in various expense items in numerous categories.
The provision for income of $8.5taxes increased $3.0 million to $17.5 million compared to the prior year.$14.5 million in 2013. The decline wasincrease is primarily due to an unfavorable shifta $10.4 million increase in asset mix as we experienced significant loan pay downs throughout 2011 which have been invested in lower yielding assets. Our noninterest income declined $3.2 million from the prior year, due to regulatory changes which significantly impacted our service charges. We did experience a slight decline in expensespretax income.

26
Table of $1.7 million, primarily due lower Federal Deposit Insurance Corporation, or FDIC, assessments compared to the prior year.

Our total assets remained relatively unchanged from the prior year; however, we had significant loan pay downs as evidenced by a decline in our loan balances of $231.3 million from the prior year. These excess funds as a result of loan pay downs are primarily being held as excess cash at the Federal Reserve. We did experience some relief in the pace of loan pay downs in the latter half of 2011. Our deposit base remains strong and we did have an improvement in our mix of deposits compared to the prior year. Our capital ratios did decline due to the redemption of the CPP, but still remain significantly above the “well capitalized” thresholds of federal bank regulatory agencies with a leverage ratio of 9.17 percent, tier 1 risk-based capital ratio of 11.63 percent and total risk based capital ratio of 15.20 percent.

In 2012, our performance will again be heavily influenced by asset quality. If the economy continues to stabilize and improve, we should expect to see continued progress in reducing net charge-offs, nonperforming loans and provision for loan losses. However, a continuation of the economic slowdown, regionally or nationally, could cause deterioration in our asset quality. We recognize that our shift to a greater dependence on commercial loans in recent years exposes us to larger credit risks and greater swings in nonperforming loans and loan charge-offs when problems do occur. We will focus on mitigating this risk through our disciplined credit risk management practices, such as the review of such loans by our Criticized Asset Committee and continued sound underwriting practices. Because the majority of our revenue comes from net interest income, net loan and deposit growth, combined with the relative pricing and mix of that growth are major factors that affect our operations and financial condition. Our net interest margin will be a challenge as we move into 2012, especially if we continue to experience significant loan paydowns and we expect to see further compression in our net interest margin.

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Contents


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued


Net Interest Income
Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads.

Maintaining consistent spreads between interest-earning assets and interest-bearing liabilities is significant to our financial performance because net interest income comprised 76 percent of operating revenue (net interest income plus noninterest income, excluding security gains/losses and non-recurring income and expenses) in 2014 and 74 percent of operating revenue in 2013. Refer to page 52 Explanation of Use of Non-GAAP Financial Measures for a discussion of operating revenue as a non-GAAP financial measure. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee, or ALCO, in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to maintain an acceptable net interest margin on interest-earning assets.

The interest income on interest-earning assets and the net interest margin are presented on a fully taxable-equivalent, or FTE, basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory tax rate of 35 percent for each period and the dividend-received deduction for equity securities. We believe this measure to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable amounts.
The following table reconciles interest income and interest rates per the Consolidated Statements of Net Income to net interest income and rates adjusted to a FTE basis for the periods presented:
 Years Ended December 31,
(dollars in thousands)2014
 2013
 2012
Total interest income$160,523
 $153,756
 $156,251
Total interest expense12,481
 14,563
 21,024
Net interest income per consolidated statements of net income148,042
 139,193
 135,227
Adjustment to FTE basis5,461
 4,850
 4,471
Net Interest Income (FTE) (non-GAAP)$153,503
 $144,043
 $139,698
Net interest margin3.38% 3.39% 3.45%
Adjustment to FTE basis0.12
 0.11
 0.12
Net Interest Margin (FTE) (non-GAAP)3.50% 3.50% 3.57%

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued


Average Balance Sheet and Net Interest Income Analysis
The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the years ended December 31:
 2014 2013 2012
(dollars in thousands)
Average
Balance

 Interest
 Rate
 
Average
Balance

 Interest
 Rate
 
Average
Balance

 Interest
 Rate
ASSETS                 
Loans(1)(2) 
$3,707,808
 $150,531
 4.06% $3,448,529
 $145,366
 4.22% $3,213,018
 $147,819
 4.59%
Interest-bearing deposits with banks92,972
 234
 0.25% 167,952
 444
 0.26% 289,947
 718
 0.25%
Taxable investment securities(3)
443,186
 8,803
 1.99% 371,099
 7,458
 2.01% 291,483
 7,346
 2.52%
Tax-exempt investment
securities(2)
128,750
 5,933
 4.61% 110,009
 5,231
 4.76% 95,382
 4,802
 5.03%
Federal Home Loan Bank and other restricted stock14,083
 483
 3.43% 13,692
 107
 0.78% 17,945
 37
 0.21%
Total Interest-earning Assets4,386,799
 165,984
 3.78% 4,111,281
 158,606
 3.86% 3,907,775
 160,722
 4.10%
Noninterest-earning assets:                 
Cash and due from banks50,255
     51,534
     53,517
    
Premises and equipment, net36,115
     37,087
     38,460
    
Other assets337,205
     353,857
     361,982
    
Less allowance for loan losses(48,011)     (47,967)     (49,196)    
Total Assets$4,762,363
     $4,505,792
     $4,312,538
    
LIABILITIES AND
SHAREHOLDERS’ EQUITY
                 
Interest-bearing liabilities:                 
Interest-bearing demand$321,907
 $70
 0.02% $309,748
 $75
 0.02% $306,994
 $146
 0.05%
Money market321,294
 507
 0.16% 319,831
 446
 0.14% 308,719
 528
 0.17%
Savings1,033,482
 1,607
 0.16% 1,001,209
 1,735
 0.17% 902,889
 2,356
 0.26%
Certificates of deposit905,346
 7,165
 0.79% 973,339
 8,918
 0.92% 1,078,945
 13,715
 1.27%
Brokered deposits226,169
 780
 0.34% 81,112
 232
 0.29% 25,317
 51
 0.20%
Total Interest-bearing deposits2,808,198
 10,129
 0.36% 2,685,239
 11,406
 0.42% 2,622,864
 16,796
 0.64%
Securities sold under repurchase agreements28,372
 2
 0.01% 54,057
 62
 0.12% 47,388
 82
 0.17%
Short-term borrowings164,811
 511
 0.31% 101,973
 279
 0.27% 50,212
 123
 0.24%
Long-term borrowings20,571
 617
 3.00% 24,312
 746
 3.07% 33,841
 1,107
 3.26%
Junior subordinated debt securities45,619
 1,222
 2.68% 65,989
 2,070
 3.14% 90,619
 2,916
 3.21%
Total Interest-bearing Liabilities3,067,571
 12,481
 0.41% 2,931,570
 14,563
 0.50% 2,844,924
 21,024
 0.74%
Noninterest-bearing liabilities:                 
Noninterest-bearing demand1,046,606
     955,475
     877,056
    
Other liabilities52,031
     69,976
     73,746
    
Shareholders’ equity596,155
     548,771
     516,812
    
Total Liabilities and Shareholders’ Equity$4,762,363
     $4,505,792
     $4,312,538
    
Net Interest Income(2)(3)
  $153,503
     $144,043
     $139,698
  
Net Interest Margin(2)(3)
    3.50%     3.50%     3.57%
(1)Nonaccruing loans are included in the daily average loan amounts outstanding.
(2)Tax-exempt income is on a FTE basis using the statutory federal corporate income tax rate of 35 percent.
(3)Taxable investment income is adjusted for the dividend-received deduction for equity securities.

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The following table details a summary of the changes in interest earned and interest paid resulting from changes in volume and rates for the years presented:
(dollars in thousands)
2014 Compared to 2013
Increase (Decrease) Due to
 2013 Compared to 2012
Increase (Decrease) Due to
Volume(4)

 
Rate(4)

 Net
 
Volume(4)

 
Rate(4)

 Net
Interest earned on:           
Loans(1)(2)
$10,929
 $(5,764) $5,165
 $10,835
 $(13,288) $(2,453)
Interest-bearing deposits with bank(198) (12) (210) (302) 28
 (274)
Taxable investment securities(3)
1,449
 (104) 1,345
 2,007
 (1,895) 112
Tax-exempt investment securities(2)
891
 (189) 702
 735
 (306) 429
Federal Home Loan Bank and other restricted stock3
 374
 377
 (8) 78
 70
Total Interest-earning Assets13,074
 (5,695) 7,379
 13,267
 (15,383) (2,116)
Interest paid on:           
Interest-bearing demand$3
 $(8) $(5) $1
 $(72) $(71)
Money market2
 59
 61
 19
 (101) (82)
Savings56
 (184) (128) 257
 (878) (621)
Certificates of deposit(623) (1,130) (1,753) (1,343) (3,454) (4,797)
Brokered deposits415
 133
 548
 112
 69
 181
Securities sold under repurchase agreements(30) (29) (59) 12
 (32) (20)
Short-term borrowings172
 60
 232
 126
 30
 156
Long-term borrowings(115) (14) (129) (311) (50) (361)
Junior subordinated debt securities(639) (209) (848) (792) (54) (846)
Total Interest-bearing Liabilities(759) (1,322) (2,081) (1,919) (4,542) (6,461)
Net Change in Net Interest Income$13,833
 $(4,373) $9,460
 $15,186
 $(10,841) $4,345
(1)Nonaccruing loans are included in the daily average loan amounts outstanding.
(2)Tax-exempt income is on a FTE basis using the statutory federal corporate income tax rate of 35 percent.
(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.
Net interest income on a FTE basis increased $9.5 million, or 6.6 percent, to $153.5 million compared to $144.0 million in 2013. Net interest margin on a FTE basis remained unchanged at 3.50 percent compared to 2013. The increase in interest income of $7.4 million, or 4.7 percent, was mainly driven by the $275.5 million increase in interest-earning assets compared to 2013. The interest-earning asset balance increase is mainly attributable to loan growth. Average loan balances increased by $259.3 million compared to 2013 as a result of organic growth, primarily in our commercial loan portfolio. Due to the continued low interest rate environment the rate earned on loans decreased 16 basis points compared to 2013. Average interest-bearing deposits with banks, which is primarily cash at the Federal Reserve, decreased $75.0 million compared to 2013. Average investment securities, including Federal Home Loan Bank, or FHLB, and other restricted stock, increased $91.2 million compared to 2013. Deployment of excess cash at the Federal Reserve to higher yielding investment securities and an increase in the FHLB dividend rate had a positive impact on the interest-earning asset rate. Overall, the FTE rate on total interest-earning assets decreased 8 basis points to 3.78 percent compared to 2013.
Interest expense decreased $2.1 million to $12.5 million for 2014 as compared to $14.6 million for 2013. The decrease in interest expense is mainly due to a shift in the mix of our interest-bearing liabilities from higher rate certificates of deposits, or CDs, to lower cost deposits and borrowings. Total interest-bearing deposits increased $123.0 million in 2014 compared to 2013. Higher interest-bearing deposits are due to an increase of $145.1 million in brokered deposits and an increase of $45.9 million in interest-bearing demand, money market and savings balances offset by a decrease in CDs of $68.0 million compared to 2013. The cost of total interest-bearing deposits decreased 6 basis points to 0.36 percent for 2014 compared to 0.42 percent for 2013. The decrease in the cost of interest-bearing deposits was mainly due to the maturity of higher rate CDs being replaced by lower rate deposits. In addition to a shift in the mix of our interest-bearing liabilities, interest expense for 2014 also decreased due to the redemption of $45.0 million of subordinated debt during the second quarter of 2013. Interest expense on average borrowings declined by $0.8 million in 2014 compared to 2013. Overall, the cost of interest-bearing liabilities decreased 9 basis points to 0.41 percent in 2014 as compared to 0.50 percent in 2013.

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Provision for Loan Losses
The provision for loan losses is the amount to be added to the ALL after adjusting for charge-offs and recoveries to bring the ALL to a level considered appropriate to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $6.6 million, or 79 percent, to $1.7 million for 2014 compared to $8.3 million for 2013. The decrease is due to continued improvement in the economic conditions in our markets which resulted in a significant improvement in our asset quality. Net charge-offs were only $0.1 million, or zero percent of average loans in 2014, compared to $8.5 million, or
0.25 percent of average loans in 2013. Total nonperforming loans were $12.5 million, or 0.32 percent of total loans at December 31, 2014, which represents a 45 percent decrease from $22.5 million, or 0.63 percent of total loans at
December 31, 2013. Special mention and substandard commercial loans also decreased $50.8 million, or 31 percent, to
$112.2 million from $163.0 million at December 31, 2013. Refer to the Allowance for Loan Losses section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations,

or MD&A, for further details.

Noninterest Income
 Years Ended December 31,
(dollars in thousands)2014
 2013
 $ Change
 % Change
Securities gains, net$41
 $5
 $36
 NM
Wealth management fees11,343
 10,696
 647
 6.0 %
Debit and credit card fees10,781
 10,931
 (150) (1.4)%
Service charges on deposit accounts10,559
 10,488
 71
 0.7 %
Insurance fees5,955
 6,248
 (293) (4.7)%
Gain on sale of merchant card servicing business—
 3,093
 (3,093) — %
Mortgage banking917
 2,123
 (1,206) (56.8)%
Other Income:
   
  
BOLI income1,773
 1,856
 (83) (4.5)%
Letter of credit origination fees1,017
 1,098
 (81) (7.4)%
Interest rate swap fees440
 1,012
 (572) (56.5)%
Other3,512
 3,977
 (465) (11.7)%
Total Other Noninterest Income6,742
 7,943
 (1,201) (15.1)%
Total Noninterest Income$46,338
 $51,527
 $(5,189) (10.1)%
NM- percentage not meaningful
Noninterest income decreased $5.2 million, or 10.1 percent, in 2014 compared to 2013. The decrease primarily related to the sale of our merchant card servicing business in 2013 combined with decreases in mortgage banking and other noninterest income. These decreases were partially offset by an increase in wealth management fees.
During the first quarter of 2013, we sold our merchant card servicing business for $4.8 million and paid deconversion and termination fees of $1.7 million to the merchant processor resulting in a net gain of $3.1 million. In conjunction with the sale of the merchant card servicing business, we entered into a marketing and sales alliance agreement with the purchaser, providing transition fees, royalties and referral revenue. Income from the marketing and sales alliance agreement is included in debit and credit card fees.
Mortgage banking income decreased $1.2 million in 2014 compared to 2013 due to an increase in mortgage rates that occurred in the second quarter of 2013, resulting in a decrease in the volume of loans originated for sale in the secondary market, less favorable pricing on loan sales and also impacted the valuation of our mortgage servicing rights, or MSRs, asset. During the year ended December 31, 2014, we sold 33 percent fewer mortgages with $42.0 million in loan sales compared to $62.9 million during 2013. We maintain the servicing rights when selling our loans and experienced a minor impairment on our MSR asset in 2014 compared to an impairment recapture of $0.8 million in 2013.
Interest rate swap fees from our commercial customers decreased $0.6 million compared to the prior year due to a decline in customer demand for this product. The decrease in other noninterest income of $0.5 million for year ended December 31, 2014 was primarily attributable to a change in the valuation of our rabbi trust related to a deferred compensation plan, which has a corresponding offset in salaries and benefit expense resulting in no impact to net income. Wealth management fees increased $0.6 million due to higher assets under management, new business development efforts and fee increases.



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Noninterest Expense
 Years Ended December 31,
(dollars in thousands)2014
 2013
 $ Change
 % Change
Salaries and employee benefits$60,442
 $60,847
 $(405) (0.7)%
Data processing8,737
 8,263
 474
 5.7 %
Net occupancy8,211
 8,018
 193
 2.4 %
Furniture and equipment5,317
 4,883
 434
 8.9 %
Professional services and legal3,717
 4,184
 (467) (11.2)%
Marketing3,316
 2,929
 387
 13.2 %
Other taxes2,905
 3,743
 (838) (22.4)%
FDIC insurance2,436
 2,772
 (336) (12.1)%
Merger related expense689
 838
 (149) (17.8)%
Other expenses:
   
  
Joint venture amortization4,054
 4,095
 (41) (1.0)%
Loan related expenses2,579
 2,432
 147
 6.0 %
Telecommunications2,220
 1,691
 529
 31.3 %
Supplies1,161
 1,130
 31
 2.7 %
Amortization of intangibles1,129
 1,591
 (462) (29.0)%
Postage1,058
 970
 88
 9.1 %
Other9,269
 9,006
 263
 2.9 %
Total Other Noninterest Expense21,470
 20,915
 555
 2.7 %
Total Noninterest Expense$117,240
 $117,392
 $(152) (0.1)%
Noninterest expense remained relatively unchanged during 2014. Increases in data processing, furniture and equipment, marketing and telecommunication expenses were offset by decreases in salaries and employee benefits, professional services and legal, other taxes, amortization of intangibles and Federal Deposit Insurance Corporation, or FDIC, insurance.
The increase of $0.5 million in data processing expense in 2014 primarily related to the implementation of a new teller platform and software that significantly strengthens the authentication of our customers that use our online banking product. The increase of $0.4 million in furniture and equipment is due to purchases of furniture and equipment for our newly opened locations, including our LPO in central Ohio, our branch in State College, Pennsylvania and our new training and operations center. The increase in marketing expense of $0.4 million is due to additional marketing promotions and the transition to a new marketing agency during 2014. Telecommunication expense increased $0.5 million due to a network upgrade.
Salaries and employee benefits decreased $0.4 million during 2014 primarily due to a $2.1 million reduction in pension expense resulting from a change in actuarial assumptions used to calculate our pension liability, offset by an increase of $1.8 million in incentive expense due to our strong performance in 2014. Professional services and legal expense decreased $0.5 million primarily due to additional external accounting and consulting charges that were incurred in 2013. Other taxes decreased $0.8 million during 2014 due to legislative changes that resulted in a reduction in Pennsylvania shares tax expense. FDIC insurance charges are based in part on our financial ratios which have improved, resulting in a decrease in our assessment of $0.3 million. Amortization of intangibles related to former acquisitions decreased $0.5 million during 2014 due to the core deposit intangible, or CDI, for one of those acquisitions being fully amortized at the end of 2013.
Our efficiency ratio, which measures noninterest expense as a percent of noninterest income plus net interest income, on a FTE basis, excluding security gains/losses, was 59 percent for 2014 and 60 percent for 2013. Refer to page 57 Explanation of Use of Non-GAAP Financial Measures for a discussion of this non-GAAP financial measure.
Federal Income Taxes
We recorded a federal income tax provision of $17.5 million in 2014 compared to $14.5 million in 2013. The effective tax rate, which is the provision for income taxes as a percentage of pretax income was 23.2 percent in 2014 compared to 22.3 percent in 2013. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 35 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on bank owned life insurance, or BOLI, and tax benefits associated with Low Income Housing Tax Credits, or LIHTC. The increase to our effective tax rate was primarily due to an increase of $10.4 million in pre-tax income which diluted the permanent benefits listed above.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued


Results of Operations
Year Ended December 31, 2011

Net Income

2013

Earnings Summary
Net income available to common shareholders for 2011 was $39.7increased $16.3 million, asor 48 percent, to $50.5 million or $1.70 per share in 2013 compared to $37.3$34.2 million in 2010, resulting in diluted earningsor $1.18 per common share of $1.41 compared to $1.34 diluted earnings per common share in 2010.2012. The increase in net income was primarily due to higher net interest income of $4.0 million, or three percent, a result of a reduction of $13.9$14.5 million, or 64 percent, decrease in the provision for loan losses partially offsetand a $5.5 million, or four percent, decrease in noninterest expense. The common return on average assets increased from 0.79 percent at December 31, 2012 to 1.12 percent at December 31, 2013, and the common return on average equity rose to 9.21 percent at December 31, 2013, from 6.62 percent at December 31, 2012.
Net interest income increased $4.0 million to $139.2 million compared to $135.2 million in 2012 due to improvement in our funding costs along with an increase in average interest earning assets of $203.5 million, or 5.2 percent. The increase in earning assets resulted from higher average loans outstanding due to strong organic loan growth in 2013 and our two acquisitions in 2012.
The provision for loan losses decreased $14.5 million to $8.3 million during 2013 compared to $22.8 million in 2012. The decrease in the provision for loan losses for the year is a result of the improving economic conditions which have positively impacted our asset quality metrics in all categories, including decreases in loan charge-offs, nonaccrual loans, special mention and substandard loans and the delinquency status of our loan portfolio. Net loan charge-offs decreased 66 percent to $8.5 million in net interest income and $3.22013 compared to $25.2 million in 2012.
Total noninterest income was relatively unchanged at $51.5 million for the year ended December 31, 2013 compared to $51.9 million for 2012. The decrease of $0.4 million was primarily due to a $3.0 million gain on the sale of securities in 2012, $0.8 million decrease in mortgage banking and $1.0 million decrease other noninterest income.

Return These decreases were offset by a $3.1 million net gain from the sale of our merchant card servicing business and other increases in wealth management income, services charges on Equitydeposits and Assets

insurance income.

Total noninterest expense decreased $5.5 million to $117.4 million for the year ended 2013 compared to $122.9 million for 2012. Professional services and legal decreased $1.5 million, data processing decreased $0.6 million and other noninterest expense decreased $4.1 million. These decreases were primarily a result of a $5.1 million decrease in merger related expenses that were incurred in 2012 as well as expense control initiatives implemented throughout 2013. The table below presentsdecrease in other noninterest expense was primarily in other real estate owned, or OREO, and unfunded loan commitments. These decreases were offset by increases in salaries and benefits, which increased $0.6 million, net occupancy, which increased $0.4 million and other taxes, which increased $0.5 million from 2012. These increases are due to growth from our consolidated profitabilityacquisitions and capital ratiosthe expansion of loan production into Ohio in 2012.
The $23.6 million increase in pretax income resulted in an increase of $7.2 million in the provision for eachincome taxes of the last three years:

Years Ended December 31  2011  2010   2009 

Common return on average assets

   0.97%   0.90%    0.05% 

Common return on average equity

   6.78%   6.58%    0.37% 

Dividend payout ratio

   42.44%   44.75%    1247.64% 

Common equity to asset ratio

   11.91%   11.48%    10.74% 

$14.5 million in 2013 compared to $7.3 million in 2012.

Net Interest Income

Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. Maintaining consistent spreads between interest-earning assets and interest-bearing liabilities is significant to our financial performance because net interest income comprised 7674 percent of operating revenue (net interest income plus noninterest income, excluding security gains/losses)losses and non-recurring income and expenses) in both 20112013 and 2010.73 percent of operating revenue in 2012. Refer to page 5865 Explanation of Use of Non-GAAP Financial Measures for a discussion of operating revenue as a non-GAAP financial measure. The level and mix of interest-earning assets and interest-bearing liabilities are continually monitoredmanaged by our Asset and Liability Committee, or ALCO in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were successfully added and implemented, within prescribed ALCO risk parameters, to maintain an acceptable net yield on interest-earning assets (net interest margin) given the challenges of the current interest rate environment.

margin.

The interest income on interest-earning assets and the net interest margin are presented on a fully taxable-equivalentFTE basis. The fully taxable-equivalentFTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35 percent for each period. We believe this measure to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable amounts.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued



The following table reconciles interest income per the Consolidated Statements of Income to net interest income adjustedand net interest margin from a GAAP to a fully taxable-equivalent basis:

Years Ended December 31  2011   2010   2009 
(in thousands)            

Interest income per Consolidated Statements of Income

  $165,079    $180,419    $195,087  

Adjustment to fully taxable-equivalent basis

   4,154     4,627     5,202  

Interest income adjusted to fully taxable-equivalent basis

   169,233     185,046     200,289  

Interest expense per Consolidated Statements of Income

   27,733     34,573     49,105  

Net Interest Income Adjusted to Fully Taxable-equivalent Basis (non-GAAP)

  $141,500    $150,473    $151,184  

PAGE non-GAAP basis for the years presented:

 Years Ended December 31,
(dollars in thousands)2013
 2012
 2011
Total interest income$153,756
 $156,251
 $165,079
Total interest expense14,563
 21,024
 27,733
Net interest income per consolidated statements of net income139,193
 135,227
 137,346
Adjustment to FTE basis4,850
 4,471
 4,154
Net Interest Income (FTE) (non-GAAP)$144,043
 $139,698
 $141,500
Net interest margin3.39% 3.45% 3.72%
Adjustment to FTE basis0.11
 0.12
 0.11
Net Interest Margin (FTE) (non-GAAP)3.50% 3.57% 3.83%

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued



Average Balance Sheet and Net Interest Income Analysis

The following table provides information regarding the average balances, interest and yieldsrates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities:

December 31

 2011  2010  2009 
 Average
Balance		  Interest  Yield/
Rate		  Average
Balance		  Interest  Yield/
Rate		  Average
Balance		  Interest  Yield/
Rate		 
(in thousands)                           

ASSETS

         

Loans(1)(2)

 $3,216,856   $156,845    4.88%  $3,386,103   $172,319    5.09%  $3,473,169   $182,767    5.26% 

Taxable investment securities

  273,320    8,475    3.10%   226,714    8,373    3.69%   286,295    11,897    4.16% 

Tax-exempt investment securities(2)

  62,607    3,611    5.77%   76,707    4,354    5.68%   103,832    5,624    5.42% 

Federal Home Loan Bank stock

  20,091    —    —%   23,336    —    —%   23,542    —    —% 

Interest-bearing balance with banks

  123,714    302    0.24%   49    —    0.34%   54    —    0.17% 

Federal funds sold

  —    —    —%   —    —    —%   258    1    0.25% 

Total Interest-earning Assets

  3,696,588    169,233    4.58%   3,712,909    185,046    4.98%   3,887,150    200,289    5.15% 

Noninterest-earning assets:

         

Cash and due from banks

  50,458      90,462      67,405    

Premises and equipment, net

  38,425      39,142      41,915    

Other assets

  344,378      340,234      320,803    

Less allowance for loan losses

  (57,241)           (59,292)           (57,985)         

Total Assets

 $4,072,608           $4,123,455           $4,259,288          

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

      

Interest-bearing liabilities:

         

Interest-bearing demand and money market

 $536,085   $739    0.14%  $518,383   $1,220    0.24%  $485,742   $1,616    0.33% 

Savings

  761,274    1,267    0.17%   749,325    2,127    0.28%   758,216    3,465    0.46% 

Certificates of deposit

  1,181,823    20,946    1.77%   1,300,803    25,370    1.95%   1,367,372    33,358    2.44% 

Federal funds purchased

  —    —    —%   —    —    —%   115    1    0.79% 

Securities sold under repurchase agreements

  41,584    53    0.13%   46,490    64    0.14%   86,616    140    0.16% 

Short-term borrowings

  551    2    0.32%   32,473    146    0.45%   104,217    544    0.52% 

Long-term borrowings

  31,651    1,091    3.45%   42,920    1,643    3.83%   127,045    5,568    4.38% 

Junior subordinated debt securities

  90,619    3,635    4.01%   90,619    4,003    4.42%   90,619    4,413    4.87% 

Total Interest-bearing Liabilities

  2,643,587    27,733    1.05%   2,781,013    34,573    1.24%   3,019,942    49,105    1.63% 

Noninterest-bearing liabilities:

         

Noninterest-bearing demand

  792,911      728,708      637,434    

Other liabilities

  50,924      47,064      57,377    

Shareholders’ equity

  585,186            566,670            544,535          

Total Liabilities and Shareholders’ Equity

 $4,072,608           $4,123,455           $4,259,288          

Net Interest Income

     $141,500           $150,473           $151,184      

Net Yield on Interest-earning Assets

          3.83%           4.05%           3.89% 
liabilities for the years ended December 31:
 2013 2012 2011
(dollars in thousands)
Average
Balance

 Interest
 Rate
 
Average
Balance

 Interest
 Rate
 
Average
Balance

 Interest
 Rate
ASSETS                 
Loans(1)(2)
$3,448,529
 $145,366
 4.22% $3,213,018
 $147,819
 4.59% $3,216,856

$156,845

4.88%
Interest-bearing deposits with banks167,952
 444
 0.26% 289,947
 718
 0.25% 123,714

302

0.24%
Taxable investment
securities(3)
371,099
 7,458
 2.01% 291,483
 7,346
 2.52% 270,805

8,471

3.13%
Tax-exempt investment securities(2)
110,009
 5,231
 4.76% 95,382
 4,802
 5.03% 64,357

3,611

5.61%
Federal Home Loan Bank and other restricted stock13,692
 107
 0.78% 17,945
 37
 0.21% 20,856

4

0.02%
Total Interest-earning Assets4,111,281
 158,606
 3.86% 3,907,775
 160,722
 4.10% 3,696,588
 169,233
 4.58%
Noninterest-earning assets:                 
Cash and due from banks51,534
     53,517
     50,458
    
Premises and equipment, net37,087
     38,460
     38,425
    
Other assets353,857
     361,982
     344,378
    
Less allowance for loan losses(47,967)     (49,196)     (57,241)    
Total Assets4,505,792
     4,312,538
     4,072,608
    
LIABILITIES AND
SHAREHOLDERS’ EQUITY
                 
Interest-bearing liabilities:                 
Interest-bearing demand309,748
 75
 0.02% 306,994
 146
 0.05% 286,588

363

0.13%
Money market319,831
 446
 0.14% 308,719
 528
 0.17% 249,497

376

0.15%
Savings1,001,209
 1,735
 0.17% 902,889
 2,356
 0.26% 761,274

1,267

0.17%
Certificates of deposit1,054,451
 9,150
 0.87% 1,104,262
 13,766
 1.24% 1,181,823

20,946

1.77%
Total Interest-bearing deposits2,685,239
 11,406
 0.42% 2,622,864
 16,796
 0.64% 2,479,182
 22,952
 0.93%
Securities sold under repurchase agreements54,057
 62
 0.12% 47,388
 82
 0.17% 41,584

53

0.13%
Short-term borrowings101,973
 279
 0.27% 50,212
 123
 0.24% 551

2

0.32%
Long-term borrowings24,312
 746
 3.07% 33,841
 1,107
 3.26% 31,651

1,091

3.45%
Junior subordinated debt securities65,989
 2,070
 3.14% 90,619
 2,916
 3.21% 90,619

3,635

4.01%
Total Interest-bearing Liabilities2,931,570
 14,563
 0.50% 2,844,924
 21,024
 0.74% 2,643,587
 27,733
 1.05%
Noninterest-bearing liabilities:                 
Noninterest-bearing demand955,475
 

   877,056
     792,911
    
Other liabilities69,976
 

   73,746
     50,924
    
Shareholders’ equity548,771
 

   516,812
     585,186
    
Total Liabilities and Shareholders’ Equity$4,505,792
     $4,312,538
     $4,072,608
    
Net Interest Income(2)(3)
  $144,043
     $139,698
     $141,500
  
Net Interest Margin(2)(3)
    3.50%     3.57%     3.83%
(1)

For the purpose of these computations, nonaccruing

(1)Nonaccruing loans are included in the daily average loan amounts outstanding.

(2)

(2)Tax-exempt income is on a fully taxable-equivalentFTE basis including the dividend-received deduction for equity securities, using the statutory federal corporate income tax rate of 35 percentpercent.
(3)Taxable investment income is adjusted for 2011, 2010 and 2009.

the dividend-received deduction for equity securities.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued



The following table presentsdetails a summary of the changes in interest earned and interest paid resulting from changes in average balancesvolume and changes in rates:

    2011 Compared to 2010
Increase (Decrease) Due to(1)		  2010 Compared to 2009
Increase (Decrease) Due to(1)		 
  Volume  Rate  Net  Volume  Rate  Net 
(in thousands)                   

Interest earned on:

       

Loans(2)

  $(8,613)  $(6,861)  $(15,474)  $(4,581)  $(5,867)  $(10,448) 

Taxable investment securities

   1,722    (1,620)   102    (2,476)   (1,048)   (3,524) 

Tax-exempt investment securities(2)

   (800)   57    (743)   (1,469)   199    (1,270) 

Interest-bearing balance with bank

   419    (117)   302    —    —    —  

Federal funds sold

   —    —    —    (1)   —    (1) 

Total Interest-earning Assets

   (7,272)   (8,541)   (15,813)   (8,527)   (6,716)   (15,243) 

Interest paid on:

       

Interest-bearing demand and money market

  $42   $(523)  $(481)  $109   $(505)  $(396) 

Savings

   34    (894)   (860)   (41)   (1,297)   (1,338) 

Certificates of deposit

   (2,321)   (2,103)   (4,424)   (1,624)   (6,364)   (7,988) 

Federal funds purchased

   —    —    —    (1)   —    (1) 

Securities sold under repurchase agreements

   (7)   (4)   (11)   (65)   (11)   (76) 

Short-term borrowings

   (143)   (1)   (144)   (374)   (24)   (398) 

Long-term borrowings

   (431)   (121)   (552)   (3,687)   (238)   (3,925) 

Junior subordinated debt securities

   —    (368)   (368)   —    (410)   (410) 

Total Interest-bearing Liabilities

   (2,826)   (4,014)   (6,840)   (5,683)   (8,849)   (14,532) 

Change in Net Interest Income

  $(4,446)  $(4,527)  $(8,973)  $(2,844)  $2,133   $(711) 
rates for the years presented:
(dollars in thousands)
2013 Compared to 2012
Increase (Decrease) Due to
 2012 Compared to 2011
Increase (Decrease) Due to
Volume(4)

 
Rate(4)

 Net
 
Volume(4)

 
Rate(4)

 Net
Interest earned on:           
Loans(1)(2)
$10,835
 $(13,288) $(2,453) $(187)
$(8,839) $(9,026)
Interest-bearing deposits with bank(302) 28
 (274) 407

9
 416
Taxable investment securities(3)
2,007
 (1,895) 112
 647

(1,772) (1,125)
Tax-exempt investment securities(2)
735
 (306) 429
 1,741

(550) 1,191
Federal Home Loan Bank and other restricted stock(8) 78
 70
 (1)
34
 33
Total Interest-earning Assets13,267
 (15,383) (2,116) 2,607
 (11,118) (8,511)
Interest paid on:           
Interest-bearing demand$1
 $(72) $(71) $26

$(243) $(217)
Money market19
 (101) (82) 89

63
 152
Savings257
 (878) (621) 236

853
 1,089
Certificates of deposit(622) (3,994) (4,616) (1,374)
(5,806) (7,180)
Securities sold under repurchase agreements12
 (32) (20) 7

22
 29
Short-term borrowings126
 30
 156
 157

(36) 121
Long-term borrowings(311) (50) (361) 75

(59) 16
Junior subordinated debt securities(792) (54) (846) —

(719) (719)
Total Interest-bearing Liabilities(1,310) (5,151) (6,461) (784) (5,925) (6,709)
Net Change in Net Interest Income$14,577
 $(10,232) $4,345
 $3,391
 $(5,193) $(1,802)
(1)

The change

(1)Nonaccruing loans are included in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollardaily average loan amounts of the change in each.

outstanding.
(2)

(2)Tax-exempt income is on a fully taxable-equivalentFTE basis including the dividend-received deduction for equity securities, using the statutory federal corporate income tax rate of 35 percentpercent.
(3)Taxable investment income is adjusted for 2011, 2010the dividend-received deduction for equity securities.
(4)Changes to rate/volume are allocated to both rate and 2009.

volume on a proportionate dollar basis.

Net interest income and netincreased $4.3 million to $144.0 million compared to $139.7 million in 2012. Net interest margin on a fully taxable-equivalentFTE basis have decreased in 2011 asby 7 basis points to 3.50 percent compared to 2010.3.57 percent in 2012. The declineincrease in net interest income is due to the improvement in funding costs coupled with an increase of $203.5 million in average earning assets which helped to offset the impact of declining earning asset rates. The decrease in net interest margin is a result of the current low rate environment, as earning asset rates decreased faster than our ability to offset those decreases on the funding side.
Interest income decreased $2.1 million to $158.6 million in 2013 compared to $160.7 million in 2012. The decrease in interest income was primarily driven by a 37 basis point decrease in average loan repricing and replacement volume at lower rates and an unfavorable shiftto 4.22 percent compared to 4.59 percent in asset mix,2012. The impact from the decrease in average loan rates was offset in part by lower rates paidthe average loan balance increase of $235.5 million. Average investment securities increased $94.2 million and interest income increased $0.5 million on deposits and a better funding mix between deposits, including noninterest-bearing demand deposits and borrowings.

investment securities compared to 2012. The shift in asset mix during 2011 is primarily reflected by the $169.2 million decrease in average loans and an increase in average interest-bearing balance with banks, of $123.7 million. The interest-bearing balance with bankswhich is primarily funds held at the Federal Reserve, and has increaseddecreased $122.0 million during 20112013 as a result ofcash was used to fund loan pay downsgrowth and weak demand for new loans. The yield on average loans and taxable investment securities decreased 21 basis points and 59 basis points, respectively.purchases. Overall, the fully taxable-equivalent yieldFTE rate on total interest-earning assets decreased 4024 basis points to 4.583.86 percent in 20112013 as compared to 4.984.10 percent in 2010.

2012.

Interest expense decreased $6.4 million to $14.6 million for 2013 compared to $21.0 million for 2012. The primary driver of the decrease in interest expense was the maturities of CDs bearing higher interest rates. For 2011,2013, average interest-bearing deposits decreasedincreased by $89.3$62.4 million to $2.5$2.7 billion as compared to $2.6 billion 2010.2012. The decreaseincrease in average interest-bearing deposits is attributed to a $119.0$98.3 million average balance increase in savings deposits and a $13.9 million average balanceincrease in interest-bearing demand and money market accounts, partially offset by an average balance decrease in certificates of deposits or, CDs, primarily$49.8 million in brokered CDs. The cost of interest bearing deposits totaled 0.93and the cost of total deposits including noninterest bearing demand deposits was 0.42 percent aand 0.31 percent, decreases of 22 and 17 basis points from 2012, primarily due to CDs maturing and being replaced by both interest bearing and noninterest bearing demand and other lower interest rate deposits. The $24.6 million and 7 basis point decrease in junior subordinated debt is due to the early repayment of $45.0 million of junior subordinated debt during 2013. Long term borrowings decreased by $9.5 million and 19 basis points from 2010 due to lower rates paid on deposits. The costin 2013 as a result of maturities of FHLB long-term advances. Customer activity drove the $6.7 million balance increase in the securities sold under repurchase agreements, or REPOs,while the 5 basis point decrease was a result of lowering the product rate. Short term borrowings were utilized to replace the subordinated debt and other short-term borrowed fundslong term debt resulting in an increase of $51.8 million from 2012. Overall, the cost of interest-bearing liabilities decreased 1424 basis points to 0.130.50 percent as a result of lower short-term ratesfor 2013 as compared to 2010. Overall, the yield on interest-bearing liabilities decreased 19 basis points to 1.050.74 percent for 2011 as compared to 2010.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued

Positively affecting net interest income was a $121.2 million increase in average net free funds during 2011, as compared to 2010. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest driver of the increase in net free funds was an increase in noninterest-bearing demand deposit average balances, which is a result of limited investment options available to our customers in this current low rate environment.



Provision for Loan Losses

The provision for loan losses is the amount to be added to the ALL after adjusting for charge-offs and recoveries to bring the ALL to a level considered appropriate to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $14.5 million, or 64 percent, to $15.6$8.3 million for 20112013 compared to $29.5$22.8 million for 2010.2012. The substantial decrease in provision for loan losses is a result of the overall improvingdue to better economic conditions in our markets which resulted in a significant improvement in our asset quality. Net charge-offs decreased $16.6 million, or 66 percent, from the prior year and a significant decrease in net charge-offs.year. Net charge-offs decreased to $18.2were $8.5 million, 0.56or 0.25 percent of average loans in 2011 from $37.72013, compared to $25.2 million, or 1.110.78 percent of average loans in 2010 as overall asset quality improved during 2011.2012. Total nonperforming loans were $22.5 million, or 0.63 percent, of total loans at December 31, 2013, which represents a 59 percent decrease from $55.0 million, or 1.63 percent of total loans at December 31, 2012. Special mention and substandard commercial loans also decreased $146.0 million, or 47 percent, to $163.0 million from $309.0 million at December 31, 2012. Refer to the Allowance for Loan Losses section of this Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, for further details.

Noninterest Income

Years Ended December 31  2011  2010   $ Change 
(in thousands)           

Security (losses) gains, net

  $(124)  $274    $(398) 

Debit and credit card fees

   10,889    9,954     935  

Service charges on deposit accounts

   9,978    11,178     (1,200) 

Insurance fees

   8,314    8,312     2  

Wealth management fees

   8,180    7,808     372  

Mortgage banking

   1,199    3,403     (2,204) 

Other

   5,621    6,281     (660) 

Total Noninterest Income

  $44,057   $47,210    $(3,153) 

 Years Ended December 31,
(dollars in thousands)2013
 2012
 $ Change
 % Change
Securities gains, net$5
 $3,016
 $(3,011) (99.8)%
Debit and credit card fees10,931
 11,134
 (203) (1.8)%
Wealth management fees10,696
 9,808
 888
 9.1 %
Service charges on deposit accounts10,488
 9,992
 496
 5.0 %
Insurance fees6,248
 6,131
 117
 1.9 %
Gain on sale of merchant card servicing business3,093
 —
 3,093
 — %
Mortgage banking2,123
 2,878
 (755) (26.2)%
Other Income    

  
BOLI income1,856
 2,317
 (461) (19.9)%
Letter of credit origination fees1,098
 1,417
 (319) (22.5)%
Interest rate swap fees1,012
 1,036
 (24) (2.3)%
Other3,977
 4,183
 (206) (4.9)%
Total Other Noninterest Income7,943
 8,953
 (1,010) (11.3)%
Total Noninterest Income$51,527
 $51,912
 $(385) (0.7)%
Noninterest income for 2013 remained relatively unchanged compared to 2012. Increases in fees from wealth management and insurance, increases in service charges on deposit accounts and the gain on the sale of our merchant card servicing business in January 2013 were offset by decreases in gains on sale of securities, debit and credit card fees, mortgage banking and other noninterest income.
We experiencedsold our merchant card servicing business for $4.8 million and paid deconversion and termination fees of $1.7 million to the merchant processor resulting in a declinenet gain of $3.2$3.1 million. In conjunction with the sale of the merchant card servicing business, we entered into a marketing and sales alliance agreement with the purchaser, providing transition fees, royalties and referral revenue. Income from the marketing and sales alliance agreement is included in debit and credit card fees. Revenues from the marketing and sales alliance agreement of $1.7 million for 2013 were comparable to the merchant revenue included in debit and credit card fees of $1.8 million for 2012. The $0.5 million increase in service charges on deposit accounts was primarily due to increases in deposit related fees that occurred throughout 2013. Wealth management fees increased $0.9 million due to higher assets under management, primarily a result of improvements in the stock market. Further, our noninterestdiscount brokerage income increased due to higher commission fees in 2011 primarily2013 compared to 2012 as we hired additional financial advisors in 2012.
The $3.0 million decrease in security gains relates to almost no sales activity in 2013 versus the sales of two equity positions during 2012 as a result of regulatory changes and declining volumesincreases in our mortgagevalue after merger announcements. Mortgage banking area.

Service charges on deposit accountsincome decreased $1.2$0.8 million primarily relatingduring 2013 compared to the impactsprevious year due to a higher interest rate environment in 2013. Interest rates increased late in the second quarter of Regulation E, which requires customers with existing accounts to opt2013 resulting in a decrease in the volume of loans originated for overdraft coverage of certain types of electronic banking activities. Regulation E caused service charge income to decrease by $1.8 million in 2011, which we offset in part by the introduction of a new paper statement fee in August of 2011. Paper statement fees generated $0.5 million in revenue in 2011. We expect customers to continue to elect to receive electronic bank statements; therefore it is expected that paper statement fee income will decline in future periods.

Mortgage banking includes fee income related to loans soldsale in the secondary market mortgage servicing income and fair value adjustments associatedless favorable pricing on loan sales. During the year ended December 31, 2013, we sold 24 percent fewer mortgages with valuing mortgage derivatives. Although interest rates continue to be low, the volume of$62.9 million in loan sales in the secondary market have decreased resulting in a $2.2compared to $82.9 million during 2012. The decrease in mortgage banking income. During 2011, we sold $67.9other noninterest income of $1.0 million for year ended December 31, 2013 was primarily attributed to a decrease of 1-4 family mortgage loans to Fannie Mae compared to $109.3$0.5 million in 2010 which resultedBOLI income related to a death benefit received in 2012 and a lower rate of return on BOLI throughout 2013 and a decrease in fee reductionincome on letters of $0.9credit of $0.3 million. In the second quarter


36
Table of 2011, we began to retain within the loan portfolio 10 and 15 year mortgages which had previously been priced and underwritten using secondary market terms and guidelines. Additionally, we recorded higher impairment charges on our

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued

mortgage servicing asset in 2011 compared to 2010. This impairment charge reflects a decline in the value of the remaining mortgage servicing rights due to increased prepayment speeds resulting from decreases in interest rates.

We recognized $0.1 million in security losses in 2011 related to OTTI on two equity securities compared to realized gains of $0.3 million in the prior year. In the prior year, OTTI was not significant and we experienced gains as we sold several of our equity positions.

The decreases in noninterest income are partially offset by increases of $0.9 million in debit and credit card fees and $0.4 million in wealth management fees. Debit and credit card fees have increased $0.9 million in 2011 as a result of increased volume and successful marketing campaigns around signature based debit card transactions throughout 2011. Our wealth management fees increased $0.4 million from the prior year. We experienced increased fee income of $0.2 million as our customers moved to fixed annuities in this low interest rate environment. Additionally, wealth management fees were positively impacted by improving market conditions in 2011.



Noninterest Expense

Years Ended December 31  2011  2010  $ Change 
(in thousands)          

Salaries and employee benefits

  $51,078   $48,715   $2,363  

Net occupancy

   6,943    6,928    15  

Data processing

   6,853    6,145    708  

Professional services and legal

   5,437    6,889    (1,452) 

Furniture and equipment

   4,941    5,054    (113) 

FDIC assessment

   3,570    5,426    (1,856) 

Other taxes

   3,381    3,432    (51) 

Joint venture amortization

   3,302    2,573    729  

Marketing

   3,019    2,795    224  

Other expenses:

    

Amortization of intangibles

   1,737    1,943    (206) 

Other real estate owned

   1,518    1,921    (403) 

Loan collection fees

   624    1,770    (1,146) 

Unfunded loan commitments

   (1,474)   (1,555)   81  

Other

   12,979    13,597    (618) 

Total Noninterest Expense

  $103,908   $105,633   $(1,725) 

We had a slight decline in noninterest

 Years Ended December 31,
(dollars in thousands)2013
 2012
 $ Change
 % Change
Salaries and employee benefits(1)
$60,847
 $57,920
 $2,927
 5.1 %
Data processing(1)
8,263
 7,326
 937
 12.8 %
Net occupancy(1)
8,018
 7,603
 415
 5.5 %
Furniture and equipment4,883
 5,262
 (379) (7.2)%
Professional services and legal(1)
4,184
 4,610
 (426) (9.2)%
Other taxes3,743
 3,200
 543
 17.0 %
Marketing(1)
2,929
 3,206
 (277) (8.6)%
FDIC insurance2,772
 2,926
 (154) (5.3)%
Merger related expense838
 5,968
 (5,130) (86.0)%
Other expenses:    

  
Joint venture amortization4,095
 4,199
 (104) (2.5)%
Amortization of intangibles1,591
 1,709
 (118) (6.9)%
Other real estate owned445
 2,166
 (1,721) (79.5)%
Unfunded loan commitments(60) 1,811
 (1,871) (103.3)%
Other(1)
14,844
 14,957
 (113) (0.8)%
Total Other Noninterest Expense20,915
 24,842
 (3,927) (15.8)%
Total Noninterest Expense$117,392
 $122,863
 $(5,471) (4.5)%
(1) Excludes merger related expense.
Noninterest expense of $1.7decreased $5.5 million, during 2011. This was primarily a result of certain one-time expenses in 2010 and a significant decrease in our FDIC assessment in 2011.

The decrease in professional services and legal expense is dueor 4.5 percent, to $2.3 million of legal settlement costs that occurred in the first and second quarters of 2010. The decrease in the FDIC assessment of $1.9 million is the result of the FDIC changing the methodology used to calculate the assessment as of April 1, 2011 and the expiration of the FDIC’s Transaction Account Guarantee Program on December 31, 2010. Asset quality improved throughout 2011 resulting in $1.1 million less in loan collection fees. While these expenses have declined from the prior year, we expect to continue to experience elevated costs in this area as our criticized and classified loans remain above historic averages. For the year ended December 31, 2011, $1.5 million of unfunded loan commitments was reversed compared to $1.6$117.4 million, for the year ended December 31, 2010.2013 compared to 2012. The reversal of the reserve isdecrease in noninterest expense was primarily attributabledue to a decline in merger related expenses and other noninterest expense. Partially offsetting these decreases was higher expenses in several categories during 2013 due to the declinefull integration of our two acquisitions that occurred in available commitments. Additionally, approximately

PAGE 2012.

We had $0.8 million in merger related expense for the year ended December 31, 2013 compared to $6.0 million in 2012. The $0.8 million of merger related expense recognized in 2013 primarily related to the data processing system conversion of Gateway Bank. Although the Gateway Bank acquisition occurred in August 2012, the merger with S&T Bank and the system conversion was completed on February 8, 2013. The $6.0 million of merger related expense in 2012 related to our acquisition of Mainline Bancorp, Inc., or Mainline, on March 9, 2012 and Gateway Bank of Pennsylvania, or Gateway, on August 13, 2012.
Salaries and employee benefits increased $2.9 million during 2013 due to additional employees, annual merit increases, higher commissions and incentives and severance. Increases consisted of $1.3 million due to the number of net new employees from our two acquisitions in the prior year and the opening of our LPO in northeast Ohio in August 2012, as well as to the hiring of additional employees throughout our organization. Adding to the increase was our annual salary merit increase of $0.8 million and $0.5 million in severance. Commission and incentive expense increased by $1.8 million due to increased loan production and strong performance in our other business lines. Offsetting these increases was a decrease in pension expense of $1.1 million, resulting from a change in actuarial assumptions. Stock compensation expense decreased $0.4 million in 2013 because there was no new management incentive plan for 2013.
Data processing, occupancy and other taxes increased for the year ended December 31, 2013. Data processing increased $0.9 million compared to the previous year due to increased processing charges resulting from our acquisitions, the annual increase with our third party data processor and the implementation of software that significantly strengthens the authentication of our customers that use our online banking product. Occupancy increased $0.4 million primarily due to additional branch locations resulting from our two acquisitions. Offsetting this increase was savings from the closure of two branches and two drive-up facilities during 2013. The increase of $0.5 million in other taxes primarily related to the additional shares tax obligations that we assumed with the acquisitions of Mainline and Gateway.
Furniture and equipment, professional services and legal, marketing and FDIC insurance expense decreased during the year ended December 31, 2013 when compared to 2012. Furniture and equipment expense declined $0.4 million due to a decrease in depreciation expense related to assets acquired in 2008 that were fully depreciated during 2013. Marketing expense decreased $0.3 million due to fewer customer promotions in 2013. FDIC charges are based in part on financial ratios which have improved during 2013, resulting in a decrease of $0.2 million when compared with the year ended December 31, 2012.

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$0.8



Professional services and legal expense decreased $0.4 million ofcompared to 2012 because additional external accounting and consulting charges were incurred in the reserve reversal in 2011 related to an expense recognized in 2008 for a letter of credit that we were contractually obligated to fulfill. During the thirdfirst quarter of 2011, the letter of credit was drawn upon and funded and a corresponding loan charge-off was recorded. 2012.
Other noninterest expense decreased $0.6$3.9 million primarily relatedfor the year ended December 31, 2013 as compared to a $1.2 million write-off of an uncollectible receivablethe year ended December 31, 2012. The decreases in the third quarter of 2010. The receivable related to expenses for a mutual fund advised by an affiliate.

We had a $2.4 million increase in salaries and employee benefitsother noninterest expense were primarily due to the full year impactdecreases of our annual merit increase resulting in additional salary expense of $1.0$1.9 million for 2011. Additionally, restricted stock expense increased $0.7 million related to the 2010 incentive plan and a newly implemented long-term incentive plan. Incentive plans were re-instituted in 2010 which impacted the 2011 expense. Deferred loan origination costs are down by $0.9 million from 2010, which increases salaries and employee benefits in the current period since we are deferring less costs. These increases were offset by a decreasereserve for unfunded loan commitments and $1.7 million in the pension planOREO expense of $0.3due to improving asset quality. Other noninterest expense also decreased $0.5 million due to the reversal of a change incontingent liability for an Internal Revenue Service, or IRS, proposed penalty for tax year 2010. The contingent liability was assumed with the numberacquisition of participants in the plan. We do not expect to see a similar decrease in pension expenseMainline in 2012 as a result of a significant increase in our pension liability due to a decline inand was reversed when we received notice during 2013 that the discount rate of 100 basis points to 4.75%.

The $0.7IRS had waived the $0.5 million in additional data processing costs relate to one-time charges for the implementation of mobile banking and other system conversion fees. The increase of $0.7 million in joint venture amortization reflects the addition of two low income housing projects that were completed in 2011.

penalty.

Our efficiency ratio, which measures noninterest expense as a percent of noninterest income plus net interest income, on a fully taxable-equivalentFTE basis, excluding security gains/losses, was 5660 percent for 20112013 and 5465 percent for 2010.2012. Refer to page 5865 Explanation of Use of Non-GAAP Financial Measures for a discussion of this non-GAAP financial measure.

Federal Income Taxes

We recorded a federal income tax provision of $14.6$14.5 million in 20112013 compared to $14.4$7.3 million in 2010.2012. The effective tax rate, which is the provision for income taxes as a percentage of pretax income was 23.622.3 percent in 2013 compared to 25.017.5 percent in 2010.2012. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 35 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt interestincome on bank owned life insurance, or BOLI and tax benefits associated with Low Income Housing Tax Credit, or LIHTC, and Federal Historic Tax Credit Projects,LIHTC. The increase to our effective tax rate was primarily due to an increase of $23.6 million in pre-tax income which are relatively consistent regardless ofdiluted the level of pretax income.

Results of Operations

Year Ended permanent benefits listed above.


Financial Condition
December 31, 2010

Net Income

Net income available2014


Total assets increased $431.5 million, or 9.5 percent, to common shareholders for 2010$5.0 billion as of December 31, 2014 compared to $4.5 billion at December 31, 2013. Loan production was $37.3 millionstrong, resulting in diluted earnings per common sharean increase in total portfolio loans of $1.34$302.5 million, or 8.5 percent. Our commercial loan portfolio grew by $298.6 million, or 11.5 percent, to $2.9 billion while our consumer loan portfolio was relatively unchanged at $1.0 billion. Securities increased $130.8 million, or 25.7 percent, compared to $2.0December 31, 2013 due to the investment of cash held at the Federal Reserve into higher yielding securities.
Our deposit base increased $236.5 million, or $0.07 diluted earnings per common share6.4 percent, with total deposits of $3.9 billion at December 31, 2014 compared to $3.7 billion December 31, 2013. We experienced increases in 2009.all deposit categories except for a slight decline in CDs. Noninterest-bearing demand had strong growth with an increase of $91.1 million, or 9.1 percent. Money market increased $95.2 million, or 33.8 percent, compared to December 31, 2013. During the fourth quarter of 2014, we began to participate in Insured Network Deposits, or IND, and had $69.5 million of IND balance within money market accounts at December 31, 2014. Savings deposits increased $32.3 million, or 3.2 percent, compared to December 31, 2013. Short-term borrowings increased $150.0 million compared to December 31, 2013 primarily to fund our asset growth in 2014.
Total shareholder’s equity increased by $37.1 million, or 6.5 percent, compared to December 31, 2013. The substantial increase inwas primarily due to net income was primarily a result of a reduction of $42.8$57.9 million offset by $20.2 million in provision for loan losses, improving market conditions resulting in minimal OTTI charges compared to $5.3 million in 2009 and a decrease in FDIC insurance assessmentsdividends.

38
Table of $3.0 million.

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Securities Activity
Return on EquityThe balances and Assets

The table below presentsaverage rates of our consolidated profitability and capital ratios for each of the last three years:

Years Ended December 31  2010   2009   2008 

Common return on average assets

   0.90%     0.05%     1.52%  

Common return on average equity

   6.58%     0.37%     14.77%  

Dividend payout ratio

   44.75%     1247.64%     53.66%  

Common equity to asset ratio

   11.48%     10.74%     10.11%  

Net Interest Income

The interest income on interest-earning assets and the net interest marginsecurities are presented on a fully taxable-equivalent basis. The fully taxable-equivalent basis adjusts for the tax benefitbelow as of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35 percent for each period. We believe this measure to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable amounts.

The following table reconciles interest income per the Consolidated Statements of Income to net interest income adjusted to a fully taxable-equivalent basis:

Years Ended December 31  2010   2009   2008 
(in thousands)            

Interest income per Consolidated Statements of Income

  $180,419    $195,087    $216,118  

Adjustment to fully taxable-equivalent basis

   4,627     5,202     5,147  

Interest income adjusted to fully taxable-equivalent basis

   185,046     200,289     221,265  

Interest expense per Consolidated Statements of Income

   34,573     49,105     72,171  

Net Interest Income Adjusted to Fully Taxable-equivalent Basis (non-GAAP)

  $150,473    $151,184    $149,094  

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

Average Balance Sheet and Net Interest Income Analysis

The following table provides information regarding the average balances, interest and yields earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities:

December 31  2010  2009  2008 
  Average
Balance		  Interest   Yield/
Rate		  Average
Balance		  Interest   Yield/
Rate		  Average
Balance		  Interest   Yield/
Rate		 
(in thousands)                               

ASSETS

             

Loans(1)(2)

  $3,386,103   $172,319     5.09%  $3,473,169   $182,767     5.26%  $3,230,791   $201,547     6.24%  

Taxable investment securities

   226,714    8,373     3.69%   286,295    11,897     4.16%   303,442    13,651     4.50%  

Tax-exempt investment securities(2)

   76,707    4,354     5.68%   103,832    5,624     5.42%   105,781    5,429     5.13%  

Federal Home Loan Bank stock

   23,336    —     —%   23,542    —     —%   20,733    636     3.07%  

Interest-bearing balance with banks

   49    —     0.34%   54    —     0.17%   84    2     2.14%  

Federal funds sold

   —    —     —%   258    1     0.25%   124    2     1.90%  

Total Interest-earning Assets

   3,712,909    185,046     4.98%   3,887,150    200,289     5.15%   3,660,955    221,265     6.04%  

Noninterest-earning assets:

             

Cash and due from banks

   90,462       67,405       60,636     

Premises and equipment, net

   39,142       41,915       41,702     

Other assets

   340,234       320,803       246,811     

Less allowance for loan losses

   (59,292)            (57,985)            (39,102)          

Total Assets

  $4,123,455            $4,259,288            $3,971,002           

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

        

Interest-bearing liabilities:

             

Interest-bearing demand and money market

  $518,383   $1,220     0.24%  $485,742   $1,616     0.33%  $395,629   $3,022     0.76%  

Savings

   749,325    2,127     0.28%   758,216    3,465     0.46%   865,839    11,692     1.35%  

Certificates of deposit

   1,300,803    25,370     1.95%   1,367,372    33,358     2.44%   1,102,717    37,650     3.41%  

Federal funds purchased

   —    —     —%   115    1     0.79%   4,886    122     2.52%  

Securities sold under repurchase agreements

   46,490    64     0.14%   86,616    140     0.16%   124,005    1,627     1.31%  

Short-term borrowings

   32,473    146     0.45%   104,217    544     0.52%   227,918    4,263     1.87%  

Long-term borrowings

   42,920    1,643     3.83%   127,045    5,568     4.38%   196,901    9,416     4.78%  

Junior subordinated debt securities

   90,619    4,003     4.42%   90,619    4,413     4.87%   69,872    4,379     6.27%  

Total Interest-bearing Liabilities

   2,781,013    34,573     1.24%   3,019,942    49,105     1.63%   2,987,767    72,171     2.42%  

Noninterest-bearing liabilities:

             

Noninterest-bearing demand

   728,708       637,434       533,096     

Other liabilities

   47,064       57,377       42,478     

Shareholders’ equity

   566,670             544,535             407,661           

Total Liabilities and Shareholders’ Equity

  $4,123,455            $4,259,288            $3,971,002           

Net Interest Income

      $150,473            $151,184            $149,094       

Net Yield on Interest-earning Assets

            4.05%            3.89%            4.07%  
(1)

For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.

(2)

Tax-exempt income is on a fully taxable-equivalent basis, including the dividend-received deduction for equity securities, using the statutory federal corporate income tax rate of 35 percent for 2010, 2009 and 2008.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

The following table presents a summary of the changes in interest earned and interest paid resulting from changes in average balance and changes in rates:

    2010 Compared to 2009
Increase (Decrease) Due to(1)		  2009 Compared to 2008
Increase (Decrease) Due to(1)		 
  Volume  Rate  Net  Volume  Rate  Net 
(in thousands)                   

Interest earned on:

       

Loans(2)

  $(4,581)  $(5,867)  $(10,448)  $15,120   $(33,900)  $(18,780) 

Taxable investment securities

   (2,476)   (1,048)   (3,524)   (771)   (983)   (1,754) 

Tax-exempt investment securities(2)

   (1,469)   199    (1,270)   (100)   295    195  

Interest bearing balance with bank

   —    —    —    —    —    —  

Other investments

   —    —    —    86    (722)   (636) 

Federal funds sold

   (1)   —    (1)   3    (4)   (1) 

Total Interest-earning Assets

   (8,527)   (6,716)   (15,243)   14,338    (35,314)   (20,976) 

Interest paid on:

       

Interest-bearing demand and money market

  $109   $(505)  $(396)  $688   $(2,094)  $(1,406) 

Savings deposits

   (41)   (1,297)   (1,338)   (1,453)   (6,774)   (8,227) 

Certificates of deposit

   (1,624)   (6,364)   (7,988)   9,036    (13,328)   (4,292) 

Federal funds purchased

   (1)   —    (1)   (119)   (2)   (121) 

Securities sold under repurchase agreements

   (65)   (11)   (76)   (491)   (996)   (1,487) 

Short-term borrowings

   (374)   (24)   (398)   (2,314)   (1,405)   (3,719) 

Long-term borrowings

   (3,687)   (238)   (3,925)   (3,341)   (507)   (3,848) 

Junior subordinated debt securities

   —    (410)   (410)   1,300    (1,266)   34  

Total Interest-bearing Liabilities

   (5,683)   (8,849)   (14,532)   3,306    (26,372)   (23,066) 

Change in Net Interest Income

  $(2,844)  $2,133   $(711)  $11,032   $(8,942)  $2,090  
(1)

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

(2)

Tax-exempt income is on a fully taxable-equivalent basis, including the dividend-received deduction for equity securities, using the statutory federal corporate income tax rate of 35 percent for 2010, 2009 and 2008.

On a fully taxable-equivalent basis, net interest income decreased by only $0.7 million in 2010 compared to 2009 despite a $174.2 million decrease in average interest-earning assets. Net interest margin on a fully taxable-equivalent basis was 4.05 percent in 2010 as compared to 3.89 percent in 2009. The improvement in the net interest margin is mainly a result of interest-bearing liabilities repricing faster than interest-earning assets, and a better funding mix between deposits, including noninterest-bearing demand deposits, and borrowings. The net interest margin improvement was also due to an increase in payments collected on nonperforming loans in 2010 compared to 2009.

For 2010, average loans decreased $87.1 million and average securities and federal funds sold decreased $87.2 million as compared to 2009. The yield on average loans decreased 17 basis points and the yield on average securities decreased 34 basis points from 2009. Overall, the fully tax-equivalent yield on total interest-earning assets decreased 17 basis points to 4.98 percent in 2010 as compared to 5.15 percent in 2009.

For 2010, average interest-bearing deposits decreased by $42.8 million as compared to 2009. The decrease in average interest-bearing deposits is mainly attributed to a $38.5 million average balance decrease in brokered CD’s. The cost of deposits totaled 1.12 percent, a decrease of 35 basis points from 2009 due to lower rates paid on deposits. The cost of REPOs and other short-term borrowed funds decreased nine basis points to 0.27 percent as a result of lower short-term rates as compared to 2009. Overall, the yield on interest-bearing liabilities decreased 39 basis points to 1.24 percent for 2010 as compared to 2009.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

Also positively affecting net interest income was a $64.7 million increase in average net free funds during 2010 as compared to 2009. Average net free funds are the excess of noninterest-bearing demand deposits, other noninterest-bearing liabilities and shareholders’ equity over noninterest-earning assets. The largest driver of the increase in net free funds was noninterest-bearing demand deposit average balances. The increase in demand deposit average balance is due to the low interest rate environment, our marketing efforts for new demand accounts, corporate cash management services and participation in the Transaction Account Guarantee, or TAG Program.

Provision for Loan Losses

The provision for loan losses is determined based upon management’s estimates of the appropriate level of ALL needed to absorb probable inherent losses that exist in our loan portfolio. The provision for loan losses was $29.5 million for 2010 compared to $72.4 million for 2009. The substantial decrease in provision for loan losses is a result of the overall improving economic conditions from the prior year and a significant decrease in net charge-offs. Net charge-offs decreased to $37.7 million in 2010 from $55.5 million in 2009 as overall asset quality improved during 2010. Refer to the Allowance for Loan Losses section of this MD&A for further details.

Noninterest Income

Years Ended December 31  2010   2009  $ Change 
(in thousands)           

Security gains (losses), net

  $274    $(5,088)  $5,362  

Service charges on deposit accounts

   11,178     12,344    (1,166) 

Debit and credit card fees

   9,954     6,921    3,033  

Insurance fees

   8,312     7,751    561  

Wealth management fees

   7,808     7,500    308  

Mortgage banking

   3,403     2,727    676  

Other income:

     

Rabbi trust

   200     643    (443) 

Derivative fee income

   136     406    (270) 

Commercial loan rate swap valuation

   96     (616)   712  

Other

   5,849     5,992    (143) 

Total Noninterest Income

  $47,210    $38,580   $8,630  

We recognized net gains of $0.3 million on available-for-sale equity securities for the year ended December 31, 2010 as compared to $5.1 million of net losses in 2009. In 2009, we recognized $5.3 million in OTTI charges on 17 bank equity holdings. During 2010, overall market conditions improved substantially resulting in minimal OTTI charges.

Noninterest income increased $8.6 million to $47.2 million in 2010 as compared to 2009. The increase of $0.6 million in insurance fees is due to higher annual bonus commission income received in the first quarter of 2010 based upon positive trends in loss rates. Mortgage banking activities increased $0.7 million due to improved loan pricing despite a decrease of mortgages sold in the secondary market of $109.3 million compared to 2009. Debit and credit card fees increased $3.0 million primarily due to a reclass out of other noninterest income and a change in accounting from a net method of recognizing ATM interchange fees and costs in 2009 to recognizing the gross fees and gross costs individually in 2010, which accounted for $2.3 million of the increase. In addition, the increase in the volume of transactions and the conversion to an exclusive provider

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued31:

accounted for $0.5 million of the increase. The change of $0.7 million in commercial loan rate swap valuation relates to a $0.6 million charge for an additional credit exposure on an exited commercial loan swap asset that was recorded in 2009. These increases were partially offset by a decrease of $1.2 million in service charges on deposit accounts, primarily customer overdraft fees, due to the implementation of Regulation E on August 15, 2010. Regulation E requires customers with existing accounts to opt in for overdraft coverage of certain types of electronic banking activities. Many customers did not opt to continue the coverage resulting in a decrease in customer overdraft fees collected.

Noninterest Expense

Years Ended December 31  2010  2009   $ Change 
(in thousands)           

Salaries and employee benefits

  $48,715   $48,848    $(133) 

Net Occupancy

   6,928    6,819     109  

Professional services and legal

   6,889    4,220     2,669  

Data processing

   6,145    6,048     97  

FDIC assessment

   5,426    8,388     (2,962) 

Furniture and equipment

   5,054    4,991     63  

Other taxes

   3,432    3,733     (301) 

Marketing

   2,794    2,751     43  

Joint venture amortization

   2,573    4,393     (1,820) 

Other expenses:

     

Other real estate owned

   1,921    759     1,162  

Loan collection fees

   1,770    1,325     445  

Unfunded loan commitments

   (1,555)   2,888     (4,443) 

Other

   15,541    12,963     2,578  

Total Noninterest Expense

  $105,633   $108,126    $(2,493) 

Noninterest expense decreased by $2.5 million during 2010 compared to 2009. Decreases included $1.8 million in joint venture impairment and amortization expense that related to an impairment adjustment on a LIHTC project of $2.0 million in 2009. No significant impairment was recorded in 2010. The FDIC assessment decreased $3.0 million primarily due to a special assessment charged to all banks in the second quarter of 2009. The decrease of $4.4 million in unfunded loan commitments relates to a reduction in the reserve.

Offsetting the above mentioned decreases were increases of $2.7 million in professional services and legal expenses related to a $2.3 million one-time legal settlement cost that occurred in the first and second quarters of 2010. A $1.2 million increase in OREO expense relates to higher costs due to an increase in OREO properties in 2010. Additionally, the increase of $2.6 million in other noninterest expense relates primarily to the previously mentioned $2.3 million reclassification of ATM interchange income, as well as a $0.9 million increase in the write-off of an uncollectible receivable relating to excess expenses for a mutual fund advised by an affiliate.

Our efficiency ratio, which measures noninterest expense as a percent of noninterest income plus net interest income on a fully taxable-equivalent basis, excluding security gains/losses, was 54 percent for 2010 and 55 percent for 2009. Refer to page 58 Explanation of Use of Non-GAAP Financial Measures for a discussion of this non-GAAP financial measure.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

Federal Income Taxes

A federal income tax provision of $14.4 million was recognized in 2010 attributable to pretax income of $57.9 million for the year, compared to a tax benefit of $3.9 million on pretax income of $4.1 million for 2009.

The effective tax rate for 2010 was 24.9 percent and negative 94.7 percent in 2009. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 35 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt interest in BOLI and tax benefits associated with LIHTC and Federal Historic Tax Credit Projects, which are relatively consistent regardless of the level of pretax income.

The consistent level of tax benefits that reduce our tax rate below the 35 percent statutory rate, coupled with relatively low level of annual pretax income, produced a negative annual effective tax rate for 2009.

Financial Condition

December 31, 2011

Our total assets of $4.1 million remain relatively unchanged since December 31, 2010. Loan growth continues to be our biggest challenge as borrowers continue to be uncertain about the state of the economy. Total gross loans decreased $225.8 million to $3.1 billion at December 31, 2011 compared to $3.4 billion at December 31, 2010. Our commercial loan portfolio has experienced the most significant decrease due to soft demand, loan pay downs and planned run-off of certain loans to reduce our overall risk. Given the lack of loan growth and substantial loan pay downs that we have been experiencing during 2011, we have increased our securities by $69.6 million and excess cash held at the Federal Reserve by $148.8 million. Our strong capital position allowed us to fully redeem the preferred stock held by the U.S. Treasury as part of the CPP, without having to raise additional equity. Our core deposit base remains strong and total deposits were $3.3 billion at both December 31, 2011 and December 31, 2010. We did experience an improvement in our mix of deposits throughout 2011. Our overall borrowings increased $67.2 million to $227.9 million at December 31, 2011 compared to $160.6 million at December 31, 2010. We utilized available cash to redeem the preferred stock and increased borrowings subsequent to the pay-off to maintain our overall liquidity position.

Securities Activity

December 31  2011   2010   2009 
(in thousands)            

Obligations of U.S. government corporations and agencies

  $142,786    $125,675    $127,971  

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

   65,395     41,491     60,229  

Mortgage-backed securities of U.S. government corporations and agencies

   48,752     43,991     61,521  

Obligations of states and political subdivisions

   88,805     65,772     92,928  

Marketable equity securities

   11,858     11,096     12,211  

Total Securities Available-for-Sale

  $357,596    $288,025    $354,860  

 2014 2013 2012
(dollars in thousands)Balance
 
Average
Rate

 Balance
 
Average
Rate

 Balance
 
Average
Rate

U.S. Treasury securities$14,880
 1.24% $—
 —% $—
 —%
Obligations of U.S. government corporations and agencies269,285
 1.65% 234,751
 1.52% 212,066
 1.62%
Collateralized mortgage obligations of U.S. government corporations and agencies118,006
 2.28% 63,774
 2.38% 57,896
 2.70%
Residential mortgage-backed securities of U.S. government corporations and agencies46,668
 2.87% 48,669
 3.02% 50,623
 3.56%
Commercial mortgage-backed securities of U.S. government corporations and agencies39,673
 1.94% 39,052
 1.95% 10,158
 1.21%
Obligations of states and political subdivisions142,702
 4.36% 114,264
 4.54% 112,767
 4.26%
Marketable equity securities9,059
 4.08% 8,915
 4.14% 8,756
 4.96%
Total Securities Available-for-Sale$640,273
 2.50% $509,425
 2.53% $452,266
 2.64%
We invest in various securities in order to provide a source of liquidity, to satisfy various pledging requirements, increase net interest income and as a tool of the ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

level of liquidity available to us. Risks associated with various securities portfoliosSecurity purchases are managed and monitored bysubject to an investment policiespolicy approved annually approved by our Board of Directors and administered through ALCO and our treasury function.

The securities portfolio increased $130.8 million, or 25.7 percent, from December 31, 2013. The increase inis primarily due to the investment of cash into higher yielding assets.

Management evaluates the securities of $69.6 million from the prior year relates to $134.5 million in debt securities purchased offset by maturities, calls and normal pay downs. The purchases were part of the ALCO strategy to reinvest excess proceeds from loan pay downs and to replace security investments as they mature to maintain sufficient asset liquidity.

During 2011, we recorded minimalportfolio for OTTI of $0.1 million related to bank equity holdings withon a balance of $0.8 million that had been in a loss position for 12 months or more. This is in comparison to 2010 when we recorded less than $0.1 million in OTTI charges on 3 bank equity holdings totaling $2.1 million. The performance of the debt and equity securities markets could generate impairment in future periods requiring realized losses to be reported.

quarterly basis. At December 31, 2011,2014, our bond portfolio was in a net unrealized gains on securities classified as available-for-sale were approximately $14.9gain position of $9.3 million, as compared to $8.1net unrealized loss position of $2.3 million at December 31, 2010. Net2013. At December 31, 2014, total gross unrealized gains related to our debt securities portfolio totaled $13.2were $11.2 million offset by total gross unrealized losses of $1.8 million. Total gross unrealized losses were $7.8 million offset by total gross unrealized gains of $5.5 million at December 31, 2011 and $7.3 million at December 31, 2010.2013. The increase in unrealized gainsthe value of our securities portfolio was a result of the changing interest rate environment in 2014. Unrealized losses were not related to the underlying credit quality of the bond portfolio. All debt securities is dueare determined to a decrease inbe investment grade and are paying principal and interest rates fromaccording to the prior year. Thecontractual terms of the securities. There were no unrealized losses on marketable equity securities portfolio had net unrealized gainsas of $1.7 million at December 31, 2011 compared to net unrealized gains of $0.8 million at December 31, 2010.2014. We do not intend to sell and it is more likely than not likely that we will not be required to sell any of the securities in an unrealized loss position before recovery of itstheir amortized cost.

We are a memberdid not record any OTTI in 2014 or 2013 and no significant impairments were recorded in 2012. The performance of the Federal Home Loan Bank, or FHLB, of Pittsburgh. The FHLB requires members to purchasedebt and hold a specified level of FHLB stock based upon their level and availability of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and services offered by the FHLB. Unlike equity securities markets could generate impairments in future periods requiring realized losses to be reported.


39
Table of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value.

At December 31, 2011 and 2010, FHLB stock totaled $18.2 million and $22.4 million, respectively. This investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We reviewed and evaluated the FHLB capital stock for OTTI at December 31, 2011 through review of their most recent Form 10-Q for the period ended September 30, 2011. Based upon our review of their current financial position and redemptions of $4.1 million that we received in 2011, we do not believe OTTI exists at December 31, 2011. Subsequent to December 31, 2011, we received from the FHLB a redemption of $0.9 million of capital stock and a nominal dividend.

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Contents


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued



The following table sets forth the maturities of securities at December 31, 20112014 and the weighted average yields of such securities. Taxable-equivalent adjustments (using a 35 percent federal income tax rate) for 20112014 have been made in calculating yields on obligations of state and political subdivisions.

  Maturing 
 Within
One Year		  After
One But Within
Five Years		  After
Five But Within
Ten Years		  After
Ten Years		  No Fixed
Maturity		 
   Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount 
(in thousands)                           

Available-for-Sale

         

Obligations of U.S. government corporations and agencies

  —    —%   131,665    1.92%   11,121    3.25%   —    —%   —  

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

  —    —%   9,022    4.46%   —    —%   56,373    3.49%   —  

Mortgage-backed securities of U.S. government corporations and agencies

  —    —%   375    3.98%   11,312    4.40%   37,065    4.38%   —  

Obligations of states and political subdivisions

  8,721    4.22%   15,901    5.39%   8,360    6.23%   55,823    5.09%   —  

Marketable equity securities

 $—    —%  $—    —%  $—    —%  $—    —%  $11,858  
Total $8,721       $156,963       $30,793       $149,261       $11,858  

Weighted Average Rate

      4.22%       2.42%       4.48%       4.31%     

PAGE 46

 Maturing
 
Within
One Year
 
After
One But Within
Five Years
 
After
Five But Within
Ten Years
 
After
Ten Years
 
No Fixed
Maturity
(dollars in thousands)Amount
Yield
 Amount
Yield
 Amount
Yield
 Amount
Yield
 Amount
Yield
Available-for-Sale              
U.S. Treasury securities$—
—% $14,880
1.24% $—
—% $—
—% $—
—%
Obligations of U.S. government corporations and agencies15,184
1.90% 178,435
1.39% 75,666
2.20% —
—% —
—%
Collateralized mortgage obligations of U.S. government corporations and agencies—
—% —
—% —
—% 118,006
2.28% —
—%
Residential mortgage-backed securities of U.S. government corporations and agencies—
—% 3,165
4.39% 2,503
5.18% 41,000
2.61% —
—%
Commercial mortgage-backed securities of U.S. government corporations and agencies—
—% 30,638
1.69% 9,035
2.77% —
—
 —
—%
Obligations of states and political subdivisions6,155
5.73% 3,868
6.73% 27,122
3.97% 105,557
4.30% —
—%
Marketable equity securities—
—% —
—% —
—% —
—% 9,059
4.08%
Total$21,339
  $230,986
  $114,326
  $264,563
  $9,059
 
Weighted Average Yield 3.00%  1.55%  2.73%  3.14%  4.08%

40

Table of Contents

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued



Lending Activity

The following table summarizes our loan distribution at the endportfolio as of each of the last five years:

  2011  2010  2009  2008  2007 
December 31 Amount  % of
Total		  Amount  % of
Total		  Amount  % of
Total		  Amount  % of
Total		  Amount  % of
Total		 
(in thousands)                              

Consumer

          

Home equity

 $411,404    13.14%  $441,096    13.15%  $458,643    13.49%  $438,380    12.28%  $294,413    10.53% 

Residential mortgage

  358,846    11.47%   359,536    10.71%   357,393    10.52%   408,603    11.45%   318,067    11.37% 

Installment and other consumer

  67,131    2.14%   74,780    2.23%   81,141    2.39%   84,065    2.36%   74,839    2.67% 

Consumer construction

  2,440    0.08%   4,019    0.12%   11,836    0.35%   13,014    0.36%   6,157    0.22% 

Total Consumer Loans

  839,821    26.83%   879,431    26.21%   909,013    26.75%   944,062    26.45%   693,476    24.79% 

Commercial

          

Commercial real estate

  1,415,333    45.22%   1,494,202    44.53%   1,428,329    42.03%   1,440,200    40.36%   964,439    34.48% 

Commercial and industrial

  685,753    21.91%   722,359    21.52%   701,650    20.65%   822,543    23.05%   815,306    29.15% 

Commercial construction

  188,852    6.04%   259,598    7.74%   359,342    10.57%   361,910    10.14%   323,718    11.58% 

Total Commercial Loans

  2,289,938    73.17%   2,476,159    73.79%   2,489,321    73.25%   2,624,653    73.55%   2,103,463    75.21% 

Total Portfolio Loans

 $3,129,759    100%  $3,355,590    100%  $3,398,334    100%  $3,568,715    100%  $2,796,939    100% 

December 31:

 2014 2013 2012 2011 2010
(dollars in
thousands) 
Amount
 
% of
Total

 Amount
 
% of
Total

 Amount
 
% of
Total

 Amount
 
% of
Total

 Amount
 
% of
Total

Commercial                   
Commercial real estate$1,682,236
 43.48% $1,607,756
 45.09% $1,452,133
 43.39% $1,415,333
 45.22% $1,494,202
 44.53%
Commercial and industrial994,138
 25.70% 842,449
 23.62% 791,396
 23.65% 685,753
 21.91% 722,359
 21.52%
Commercial construction216,148
 5.59% 143,675
 4.03% 168,143
 5.02% 188,852
 6.04% 259,598
 7.74%
Total Commercial Loans2,892,522
 74.77% 2,593,880
 72.74% 2,411,672
 72.06% 2,289,938
 73.17% 2,476,159
 73.79%
Consumer                   
Residential mortgage489,586
 12.65% 487,092
 13.66% 427,303
 12.77% 358,846
 11.47% 359,536
 10.71%
Home equity418,563
 10.82% 414,195
 11.61% 431,335
 12.89% 411,404
 13.14% 441,096
 13.15%
Installment and other consumer65,567
 1.69% 67,883
 1.90% 73,875
 2.21% 67,131
 2.14% 74,780
 2.23%
Consumer construction2,508
 0.06% 3,149
 0.09% 2,437
 0.07% 2,440
 0.08% 4,019
 0.12%
Total Consumer Loans976,224
 25.23% 972,319
 27.26% 934,950
 27.94% 839,821
 26.83% 879,431
 26.21%
Total Portfolio Loans$3,868,746
 100.00% $3,566,199
 100.00% $3,346,622
 100.00% $3,129,759
 100.00% $3,355,590
 100.00%
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.

Total portfolio loans for the year endedincreased $302.5 million, or 8.5 percent, since December 31, 2011 were $3.12013, to $3.9 billion a $225.8 million decrease from the year endedat December 31, 2010. Declines occurred2014 primarily due to organic loan growth in both the consumerour CRE, C&I and commercial construction portfolios. Our expansion into Ohio, with the establishment of two LPOs, has been successful and contributed approximately $146.0 million, or 48 percent, of our total loan portfolios due to less demandgrowth in 2014. Further driving loan growth was the expansion of our market area resulting fromsales team with the current economic climate. The largest declines wereaddition of commercial lenders in the commercial loan portfolio sincevarious markets throughout 2014. Total commercial loans have been more impacted by the economic slowdownincreased $298.6 million, or 11.5 percent, from December 31, 2013 with growth in our markets. We did experience some relief in the paceall portfolios. CRE loans have increased $74.5 million, or 4.6 percent, due to strong loan demand. C&I loans increased $151.7 million, or 18.0 percent, due to new loan originations and increased utilization of lines of credit. Commercial construction loans have increased $72.5 million, or 50.4 percent, due to strong loan pay downs in the latter half of 2011.

demand and line utilizations.

Commercial loans, including commercial real estate, or CRE, commercial and industrial, or C&I and commercial construction, comprised 7375 percent and 7473 percent of total portfolio loans at December 31, 20112014 and 2010, respectively.2013. Although commercial loans can have a relatively higher risk profile, management believes these risks are mitigated through active portfolio management, conservative underwriting standards and continuous portfolio review. The loan-to-value, or LTV, policy guidelines for CRE loans are generally 65-8565-80 percent. At December 31, 2011,2014, variable rate commercial loans were 79 percent of the total commercial loans compared to 78 percent in 2013.
Consumer loans represent 25 percent of our loan portfolio asat December 31, 2014 compared to 8027 percent at December 31, 2010.

Home equity and residential mortgage loans comprised 25 percent of the loan portfolio in 2011 and 24 percent in 2010.2013. Residential mortgage lending continues to be a strategic focus through a centralized mortgage origination department, ongoing product redesign, secondary market activities

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

and the utilization of commission compensated originators. Management believes that continued adherence to our conservative mortgage lending policies for portfolio loans will be as important in a growing economy as it was during the downturn in recent years. The loan-to-valueLTV policy guideline is 80 percent for residential first lien mortgages. Higher loan-to-valueLTV loans may be approved with the appropriate private mortgage insurance coverage. Second lien positions are assumedOur policy is to only permit portfolio loans with a maximum term of 20 years for traditional mortgages to our credit-worthy borrowers, and 15 years with a maximum amortization term of 30 years for balloon payment mortgages. We may originate home equity loans with a lien position that is second to unrelated third party lenders, but normally only to the extent that the combined credit exposure forLTV considering both the first and second liens does not exceed 100 percent of the fair value of the property.

Management believes the downturn in the local residential real estate market and the impact of declining values on the real estate loan portfolio will be mitigated by our conservative mortgage lending policies for portfolio loans, which only permit a maximum term of 20 years. Balloon payment mortgages are also offered in the portfolio. The maximum balloon term is 15 years with a maximum amortization term of 30 years. Balloon mortgages with terms of 10 years or less may have a maximum amortization term for up to 40 years. Combo mortgage loans consisting of oura residential first mortgage and a home equity second mortgage are also available to credit worthy borrowers.


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We also originate and price loans for sale into the secondary market, primarily to Federal National Mortgage Association, or FNMA.Fannie Mae. At the end of the second quarter of 2014, we returned to selling all of our mortgage loan production priced for sale in the secondary market. Previously, we had been retaining 10, 15 and 20 year residential real estate loans in our portfolio and selling only 30 year mortgages in the secondary market. The rationale for these sales is to mitigate interest-rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio, to generate fee revenue from sales and servicing and to maintain the primary customer relationship. During the second quarter of 2011, we began to retain within the loan portfolio 102014 and 15 year mortgages that had been priced and underwritten using secondary market terms and guidelines. During 2011 and 2010,2013, we sold $67.9$40.1 million and $109.3$62.9 million, respectively, of 1–41-4 family mortgages to FNMAFannie Mae and currently service $332.6$327.2 million of secondary market mortgage loans at December 31, 20112014 compared to $318.2$327.4 million at December 2010.31, 2013. Loans sold to FNMAFannie Mae in 2014 decreased from the prior yearcompared to 2013 due to both the changeincrease in strategy to sell only longer term mortgages as well as reduced refinance activity as many customers refinanced earlierinterest rates that occurred in the cycle when rates first declined. second half of 2013 which caused a significant decline in mortgage refinancings.
We intend to continue to sell longer-term loans to FNMA in the future, especially during periods of lower interest rates.

Wealso offer a variety of unsecured and secured consumer loan and credit card products. Loan-to-value policyLTV guidelines for direct loans are 90–100generally 90-100 percent of invoice for new automobiles and 80–9080-90 percent of National Automobile Dealer Association or NADA, value for used automobiles.

Loan

We maintain a General Lending Policy to control the quality of our loan portfolio. The policy delegates the authority to extend loans under specific guidelines and underwriting standards are establishedstandards. The General Lending Policy is formulated by a formal policymanagement and are subject to periodic reviewreviewed and approvalratified annually by the Board of Directors. During 2011, we implementedAny exception to the General Lending Policy must be approved by the Senior Loan Committee or enhanced various new policies and procedures to strengthen loan underwriting standards, including increased monitoring, improved risk ratings, stress testing and compliance in the area of commercial lending.

Regional Loan Committee.

The following table presents the maturity of consumer and commercial loans outstanding as of December 31, 2011.

   Maturing 
    Within One
Year		   After One But
Within Five Years		   After Five
Years		   Total 
(in thousands)                

Fixed interest rates

  $62,909    $222,893    $285,172    $570,975  

Variable interest rates

   201,056     20,618     47,172     268,846  

Total Consumer Loans

  $263,965    $243,511    $332,344    $839,821  

Fixed interest rates

   149,984     217,407     104,914     472,305  

Variable interest rates

   518,078     582,988     716,567     1,817,633  

Total Commercial Loans

  $668,062    $800,395    $821,481    $2,289,938  

Total Portfolio Loans

  $932,027    $1,043,907    $1,153,825    $3,129,759  

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2014:

 Maturity
(dollars in thousands)Within One Year
 After One But Within Five Years
 After Five Years
 Total
Fixed interest rates$160,136
 $318,585
 $134,265
 $612,986
Variable interest rates609,010
 718,986
 951,540
 2,279,536
Total Commercial Loans$769,146
 $1,037,571
 $1,085,805
 $2,892,522
Fixed interest rates64,063
 223,526
 262,247
 549,836
Variable interest rates298,374
 39,372
 88,642
 426,388
Total Consumer Loans$362,437
 $262,898
 $350,889
 $976,224
Total Portfolio Loans$1,131,583
 $1,300,469
 $1,436,694
 $3,868,746

Credit Quality
On a quarterly basis, a criticized asset meeting is held to monitor all special mention and substandard loans greater than $0.5 million. These loans typically represent the highest risk of loss to us. Action plans are established and these loans are monitored through regular contact with the borrower, review of current financial information and other documentation, review of all loan or potential loan restructures/modifications and the regular re-evaluation of assets held as collateral.
Additional credit risk management practices include periodic review and update to our lending policies and procedures to support sound underwriting practices and portfolio management through portfolio stress testing. Our Loan Review process serves to independently monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all corporate lending activities. Loan Review has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process.

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Credit Quality

We monitor various credit quality indicators to mitigate the risk of adversely classified assets. We have a Criticized Asset Committee that meets quarterly and monitors all special mention loans greater than $1.0 million and substandard loans greater than $0.5 million. Additional credit risk management practices include periodic review and updates to lending policies and procedures surrounding sound underwriting practices and portfolio management expectations; a portfolio and loan stress testing initiative; and an independent loan review program developed to review underwriting decisions and adherence to policy, proper risk rating methodology and a review of all of our credit related business units. There can be no assurance that we will be successful in eliminating the risk with these loans and consequently they could result in losses for us.

We determine loans to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All of our TDRs are also classified as impaired, regardless of their size. Impaired loans are continually monitored by our Managed Assets Division.



Nonperforming assets, or NPAs, consist of nonaccrual loans, nonaccrual TDRs and OREO. The following represents nonperforming assetsNPAs for the periodsyears presented:

    2011   2010   2009   2008   2007 
(in thousands)                    

Nonaccrual Loans

          

Commercial real estate

  $20,777    $14,674    $52,380    $19,386    $7,359  

Commercial and industrial

   7,570     2,567     7,489     3,341     6,119  

Commercial construction

   3,604     5,844     21,674     13,848     —  

Home equity

   2,936     1,433     2,252     174     71  

Residential mortgage

   2,859     5,996     5,583     5,624     3,183  

Installment and other consumer

   4     65     20     73     65  

Consumer construction

   181     525     —     —     —  

Total Nonaccrual Loans

   37,931     31,104     89,398     42,446     16,797  

Nonaccrual Troubled Debt Restructurings

          

Commercial real estate

   10,871     29,636     1,409     —     —  

Commercial and industrial

   —     1,000     —     —     —  

Commercial construction

   2,943     2,143     —     —     —  

Residential mortgage

   4,370     —     —     —     —  

Total Nonaccrual Troubled Debt Restructurings

   18,184     32,779     1,409     —     —  

Total Nonperforming Loans

   56,115     63,883     90,807     42,446     16,797  

OREO

   3,967     5,820     4,607     851     488  

Total Nonperforming Assets

  $60,082    $69,703    $95,414    $43,297    $17,285  

Nonperforming loans as a percent of total loans

   1.79%     1.90%     2.67%     1.19%     0.60%  

Nonperforming assets as a percent of total loans plus OREO

   1.92%     2.07%     2.80%     1.21%     0.62%  

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

Nonperforming assets decreased 13.8 percent from the prior year as a result

(dollars in thousands)2014
 2013
 2012
 2011
 2010
Nonperforming Loans         
Commercial real estate$2,255
 $6,852
 $20,972
 $20,777
 $14,674
Commercial and industrial1,266
 1,412
 5,496
 7,570
 2,567
Commercial construction105
 34
 1,454
 3,604
 5,844
Residential mortgage1,877
 1,982
 4,526
 2,859
 5,996
Home equity1,497
 2,073
 3,312
 2,936
 1,433
Installment and other consumer21
 34
 40
 4
 65
Consumer construction—
 —
 218
 181
 525
Total Nonperforming Loans7,021
 12,387
 36,018
 37,931
 31,104
Nonperforming Troubled Debt Restructurings         
Commercial real estate2,180
 3,898
 9,584
 10,871
 29,636
Commercial and industrial356
 1,884
 939
 —
 1,000
Commercial construction1,869
 2,708
 5,324
 2,943
 2,143
Residential mortgage459
 1,356
 2,752
 4,370
 —
Home Equity562
 218
 341
 —
 —
Installment and other consumer10
 3
 —
 —
 —
Total Nonperforming Troubled Debt Restructurings5,436
 10,067
 18,940
 18,184
 32,779
Total Nonperforming Loans12,457
 22,454
 54,958
 56,115
 63,883
OREO166
 410
 911
 3,967
 5,820
Total Nonperforming Assets$12,623
 $22,864
 $55,869
 $60,082
 $69,703
Nonperforming loans as a percent of total loans0.32% 0.63% 1.63% 1.79% 1.90%
Nonperforming assets as a percent of total loans plus OREO0.33% 0.64% 1.66% 1.92% 2.07%
Our policy is to place loans in all categories in nonaccrual status when collection of resolution of several credits either through the foreclosure process and subsequent sale of the propertyinterest or ultimate charge-off of the loan. We had several relationships where weprincipal is doubtful, or generally when interest or principal payments are 90 days or more past due. There were able to work directly with the borrower to restructure the loan and after a period of performance, these loans have been placed back on accruing status. Overall, our nonperforming loan formation slowed significantly compared to the prior year. Our commercial real estate portfolio continues to represent a significant amount of our nonperforming loans. There are no loans 90 days or more past due and still accruing.

accruing at December 31, 2014 or December 31, 2013.

NPAs decreased $10.2 million, or 45 percent, to $12.6 million at December 31, 2014 compared to $22.9 million at December 31, 2013. The significant decline in NPAs can be attributed to the continued improvement of economic conditions in our markets and a strategic focus on actively managing and bringing to resolution our problem loans. NPAs decreased primarily due to $8.1 million in nonperforming loan pay downs, $4.4 million of nonperforming loans returning to accrual status, the sale of $3.2 million of nonperforming loans and $2.0 million of nonperforming loan charge-offs. During 2014, we had approximately $8.0 million of new nonperforming loans compared to $16.5 million in 2013.
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 consider. Modifications to loans classified as TDRgrant. These modified terms generally include reductions in contractual interest rates, principal deferment and extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics.characteristics, reductions in contractual interest rates or principal deferment. While unusual there may be instances of principal forgiveness. Generally these concessions are for a period of at least six months. While unusual, there may be instances of loan principal forgiveness.

Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed by the borrower as TDRs.

TDRs can be returned to accruing status if the following criteria are met: 1) the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and 2) there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.

All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining lives, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and we fully expectedexpect that the remaining principal and interest will be collected according to the


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restructured agreement. All impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements noted above to be returned to accruing status.
As an example, consider a substandard commercial real estateconstruction loan that is currently 3090 days past due. Thedue where the loan is restructured to reduceextend the maturity date for a period longer than would be considered an insignificant period of time. The post-modification interest rate is not increased to correspond with the current credit risk of the loan, butborrower and all other terms remain in placethe same according to the original loan agreement. The interest rate reduction results in a below market interest rate. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted. At the time of the modification, theThe loan will be placed onreported as nonaccrual status and reported as an impaired loan and a TDR. In addition, the loan willcould be charged down to the fair value of the collateral if the loan is collateral dependent.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 sincebecause the interest rate was reducednot adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring for a below market rate.

new loan with comparable risk.

As of December 31, 2011,2014, we had $67.9$42.4 million in total TDRs, including $37.0 million that were performing and $5.4 million that were nonperforming. This is a decrease from December 31, 2013 when we had $49.3 million in TDRs, including $39.2 million that were performing and $10.1 million that were nonperforming. Loan modifications resulting in TDRs, declined in 2014 with 44 modifications or $4.9 million of new TDRs compared to 71 modification or $11.8 million of new TDRs in 2013. Included in the 2014 new TDRs was 29 loans totaling $1.1 million related to Chapter 7 bankruptcy filings that were not reaffirmed resulting in discharged debt which $49.7compares to 56 loans totaling $2.0 million were accruing and $18.2 were in nonaccrual status. During 2011, many of these2013. For the year ended December 31, 2014 we had nine TDRs for $1.9 million that met the above requirements for being placed back into accrual status, reducing the nonaccrual TDRs by $17.1 million.

During the year ended December 31, 2011, we modified $6.9 millionreturned to performing status.


44
Table of commercial and industrial loans, $6.6 million of commercial real estate loans, $4.5 million of commercial construction loans and $2.1 million of residential real estate for financially troubled borrowers that were not considered to be TDRs. These borrowers received modifications that represented insignificant delays in the timing of payments that were not considered to be concessions. TDRs increased significantly during 2011 as we are working closely with our customers during these challenging times to establish terms that will allow the customer to continue to pay and ultimately increase our likelihood of full repayment of these loans.

OREO and other repossessed assets are comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of a foreclosure. At December 31, 2011, OREO consists of

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued

18 properties with one property comprising $1.5 million or 37 percent of the entire OREO balance. All properties have current appraisals. It is our policy to obtain appraisals annually or sooner if indications of impairment exist. Foreclosures increased to 41 in 2011 compared to 37 in 2010.



The following represents delinquency for the periods presented:

  2011  2010  2009  2008  2007 
December 31 Amount  % of
Loans		  Amount  % of
Loans		  Amount  % of
Loans		  Amount  % of
Loans		  Amount  % of
Loans		 
(in thousands)                              

90 days or more:

          

Commercial real estate

 $31,648    2.24%  $44,310    2.97%  $53,789    3.77%  $19,386    1.35%  $7,359    0.76%  

Commercial and industrial

  7,570    1.10%   3,567    0.49%   7,489    1.07%   3,341    0.41%   6,119    0.75%  

Commercial construction

  6,547    3.47%   7,987    3.08%   21,674    6.03%   13,848    3.83%   —    —%  

Home equity

  2,936    0.71%   1,433    0.32%   2,252    0.49%   174    0.04%   71    0.02%  

Residential mortgage

  7,229    2.01%   5,996    1.67%   5,583    1.56%   5,624    1.38%   3,183    1.00%  

Installment and other consumer

  4    0.01%   65    0.09%   20    0.02%   73    0.09%   65    0.09%  

Consumer construction

  181    7.42%   525    13.06%   —    —%   —    —%   —    —%  

Total Loans

 $56,115    1.79%  $63,883    1.90%  $90,807    2.67%  $42,446    1.19%  $16,797    0.60%  

30 to 89 days:

          

Commercial real estate

 $9,105    0.64%  $4,371    0.29%  $22,923    1.60%  $9,603    0.67%  $17,063    1.77%  

Commercial and industrial

  5,284    0.77%   1,714    0.24%   1,241    0.18%   3,689    0.45%   3,770    0.46%  

Commercial construction

  —    —%   835    0.32%   899    0.25%   10,446    2.89%   65    0.02%  

Home equity

  2,890    0.70%   2,451    0.56%   2,106    0.46%   356    0.08%   137    0.05%  

Residential mortgage

  2,403    0.67%   1,346    0.37%   5,151    1.44%   5,093    1.25%   3,396    1.07%  

Installment and other consumer

  452    0.67%   342    0.46%   852    1.05%   449    0.53%   426    0.57%  

Consumer construction

  —    —%   —    —%   —    —%   —    —%   —    —%  

Total Loans

 $20,134    0.64%  $11,059    0.33%  $33,172    0.98%  $29,636    0.83%  $24,857    0.89%  

as of December 31:

 2014 2013 2012 2011 2010
(dollars in thousands)Amount
% of
Loans

 Amount
% of
Loans

 Amount
% of
Loans

 Amount
% of
Loans

 Amount
% of
Loans

90 days or more:              
Commercial real estate$4,435
0.26% $10,750
0.67% $30,556
2.10% $31,648
2.24% $44,310
2.97%
Commercial and Industrial1,622
0.16% 3,296
0.39% 6,435
0.81% 7,570
1.10% 3,567
0.49%
Commercial construction1,974
0.91% 2,742
1.91% 6,778
4.03% 6,547
3.47% 7,987
3.08%
Residential mortgage2,336
0.48% 3,338
0.69% 7,278
1.70% 7,229
2.01% 5,996
1.67%
Home equity2,059
0.49% 2,291
0.55% 3,653
0.85% 2,936
0.71% 1,433
0.32%
Installment and other consumer31
0.05% 37
0.05% 40
0.05% 4
0.01% 65
0.09%
Consumer construction—
—
 —
—
 218
8.95% 181
7.42% 525
13.06%
Total Loans$12,457
0.32% $22,454
0.63% $54,958
1.64% $56,115
1.79% $63,883
1.90%
30 to 89 days:              
Commercial real estate$2,871
0.17% $1,416
0.09% $2,643
0.18% $9,105
0.64% $4,371
0.29%
Commercial and industrial1,380
0.14% 2,877
0.34% 4,646
0.59% 5,284
0.77% 1,714
0.24%
Commercial construction—
—% 1,800
1.25% 10,542
6.27% —
—
 835
0.32%
Residential mortgage1,785
0.36% 2,494
0.51% 3,661
0.86% 2,403
0.67% 1,346
0.37%
Home equity2,201
0.53% 3,127
0.75% 3,197
0.74% 2,890
0.70% 2,451
0.56%
Installment and other consumer425
0.65% 426
0.63% 501
0.68% 452
0.67% 342
0.46%
Consumer construction—
—
 —
—
 —
—
 —
—
 —
—
Total Loans$8,662
0.22% $12,140
0.34% $25,190
0.75% $20,134
0.64% $11,059
0.33%
Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including early stage delinquencies in theof 30 to 89 days past due for early identification of potential problem loans.

Loans past due 90 days or more decreased $10.0 million, or 45 percent, compared to December 31, 2013 and represent only 0.32 percent of total loans at December 31, 2014. Loans past due by 30 to 89 days decreased $3.5 million, or 29 percent, representing only 0.22 percent of total loans at December 31, 2014. Delinquency improved in all loan categories throughout 2014 due to improved economic conditions and management’s focus on actively managing delinquent 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. Determination of an adequate ALL is inherently subjective as it requires estimations of the occurrence of future events, as well as the timing of such events, and it may be subject to significant changes from period to period. The methodology for determining the AllALL has two main components: evaluation and impairment tests of individual loans and impairment tests of certain groups of homogeneous loans with similar risk characteristics.

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We enhanced our ALL model in the fourth quarter of 2010 to better align it with the regulatory guidance. The calculation of the base historical loss utilizing an average method over the prior five years was shortened to include a one to two year loss emergence period depending on the loan category over a rolling four quarter average. Loss emergence refers to the length of time between a loss event and a charge-off of the loan. With the volatility in the credit cycle at that time, the shorter time horizon was more responsive to the loss emergence periods we were experiencing in our portfolio. We believe this shorter time horizon provides a better indication of inherent losses in the loan portfolio given the recent economic downturn. We also refined the qualitative factors beginning in the fourth quarter of 2010 to better align with the regulatory guidance. Qualitative factors became a basis point adjustment applied to the historical base loss. The combination of the enhancements to the average method and the qualitative factors did not materially change the ALL at December 31, 2010, resulting in an increase in the ALL of less than $0.5 million. Since December 31, 2010, there have been no further enhancements to the ALL methodology.

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 the ALL for the past 5 years by portfolio segment:

  2011  2010  2009  2008  2007 
December 31 Amount  % of
Total		  Amount  % of
Total		  Amount  % of
Total		  Amount  % of
Total		  Amount  % of
Total		 
(in thousands)                              

Commercial real estate

 $29,804    61%  $30,424    59%  $27,322    46%  $18,781    44%   $8,014    23%  

Commercial and industrial

  11,274    23%   9,777    19%   21,393    36%   20,170    47%    23,260    68%  

Commercial construction

  3,703    8%   5,905    11%   8,008    13%   73    —%    51    —%  

Consumer real estate

  3,166    6%   3,962    8%   2,143    4%   2,750    7%    2,266    7%  

Other consumer

  894    2%   1,319    3%   714    1%   915    2%    754    2%  

Total

 $48,841    100%  $51,387    100%  $59,580    100%  $42,689    100%   $34,345    100%  

An inherent risk to the loan portfolio as a whole is the condition of the local economy. In addition, each loan segment carries with it risks specific to the segment.

CRE loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Individual project cash flows, as well as global cash flows, are generally the sources of repayment for these loans. Besides cash flow risks, CRE loans have collateral risk and risks based upon the business prospects of the lessee, if the project is not owner occupied.

C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Cash flow from the operations of the company is the primary source of repayment for these loans and the cash flow depends not only on the economy as a whole, but also on the health of the company’s industry.

Commercial construction loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk 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. There are also various risks depending on the type of project and the experience and resources of the developer.

Consumer real estate loans are secured by 1-4 family residences, including purchase money mortgages, first and second lien home equity loans and home equity lines of credit. The primary

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

source of repayment for these loans is the income and assets of the borrower. The unemployment rate, as well as the state of the local housing market have a significant impact on the risk determination, since low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

Other consumer loans are made to individuals and may be secured by assets other than 1-4 family residences, or may be unsecured. This class of loans includes auto loans, unsecured lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower so the local unemployment rate is an important indicator of risk. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

Significant to the ALL is a higher mix of commercial loans. At December 31, 2011, approximately 92 percent of the ALL related to the commercial loan portfolio, while commercial loans comprise 73 percent of our loan portfolio. Commercial loans have been more impacted by the economic slowdown in our markets and more specifically our commercial real estate loan portfolio. The ability of customers to repay commercial loans is more dependent upon the success of their business, continuing income and general economic conditions. Accordingly, the risk of loss is higher on such loans compared to consumer loans, which have incurred lower losses in our market.

The following table summarizes the ALL for each of the last five years as indicated:

December 31  2011   2010   2009   2008   2007 
(in thousands)                    

General reserves

  $43,296    $47,756    $42,577    $35,574    $31,426  

Specific reserves

   5,545     3,631     17,003     7,115     2,919  

Total Allowance for Loan Losses

  $48,841    $51,387    $59,580    $42,689    $34,345  

The balance in the ALL decreased to $48.8 million or 1.56 percent of total loans at December 31, 2011 as compared to $51.4 million or 1.53 percent of total loans at December 31, 2010. The ALL includes $5.5 million that was specifically allocated for impaired loans of $94.0 million at December 31, 2011, compared to $3.6 million that was allocated for impaired loans of $50.7 million at December 31, 2010. At December 31, 2011, the ALL was 87 percent of nonperforming loans compared to 80 percent at December 31, 2010. The slight decline in the reserve is a result of the overall improving economic conditions. More specifically the decline in the general reserve is impacted by lower loss rates that we experienced in 2011. Net charge-offs declined $19.5 million from the prior year with total net charge-offs of $18.2 million in 2011 compared to $37.7 million in 2010. The increase in the specific reserves was prompted by the increase in impaired loans during the year. Impaired loans increased $43.3 million to $94.0 million compared to $50.7 million at December 31, 2010. The increase is driven by $37.7 million of new TDRs during 2011 as we worked with our customers who are impacted by the current economic climate.

Consumer unsecured loans and secured loans that are not real estate secured are evaluated for charge-off after the loan becomes 90 days past due. At that time, unsecured loans are fully charged-off and secured loans are charged-off to the estimated

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fair value of the collateral less the cost to sell. Consumer loans secured by real estate are evaluated for charge-off after the loan balance becomes 90 days past due and are charged down to the estimated fair value of the collateral less cost to sell.

Our charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off when a confirmedthe loss exists,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

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

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;

proceeding

The value of collateral and probability of successful liquidation; and/or

The status of adverse proceedings or litigation that may result in collection.

collection

The following summarizes our loan losscharge-off experience for each of the five years presented below:

Years Ended December 31  2011  2010  2009  2008  2007 
(in thousands)                

ALL Balance at Beginning of Year:

  $51,387   $59,580   $42,689   $34,345   $33,220  

Charge-offs:

      

Commercial real estate

   (8,824)   (23,925)   (8,795)   (828)   (273) 

Commercial and industrial

   (8,971)   (7,277)   (29,350)   (4,681)   (4,921) 

Commercial construction

   (1,720)   (6,353)   (12,397)   (1,869)   (118) 

Consumer real estate

   (2,617)   (2,210)   (4,558)   (3,217)   (515) 

Other consumer

   (1,013)   (1,262)   (1,762)   (1,575)   (1,253) 

Total

   (23,145)   (41,027)   (56,862)   (12,170)   (7,080) 

Recoveries:

      

Commercial real estate

   780    576    70    523    18  

Commercial and industrial

   357    328    532    1,035    1,452  

Commercial construction

   2,463    1,748    —    —    —  

Consumer real estate

   1,030    202    276    157    256  

Other consumer

   360    469    521    501    667  

Total

   4,990    3,323    1,399    2,216    2,393  

Net Charge-offs

   (18,155)   (37,704)   (55,463)   (9,954)   (4,687) 

Provision for loan losses

   15,609    29,511    72,354    12,878    5,812  

Acquired loan loss reserve

   —    —    —    5,420    —  

ALL Balance at End of Year:

  $48,841   $51,387   $59,580   $42,689   $34,345  

 Years Ended December 31,
(dollars in thousands)2014
 2013
 2012
 2011
 2010
ALL Balance at Beginning of Year:$46,255
 $46,484
 $48,841
 $51,387
 $59,580
Charge-offs:         
Commercial real estate(2,041) (4,601) (9,627) (8,824) (23,925)
Commercial and industrial(1,267) (2,714) (5,278) (8,971) (7,277)
Commercial construction(712) (4,852) (10,521) (1,720) (6,353)
Consumer real estate(1,200) (2,407) (2,509) (2,617) (2,210)
Other consumer(1,133) (1,002) (1,078) (1,013) (1,262)
Total(6,353) (15,576) (29,013) (23,145) (41,027)
Recoveries:         
Commercial real estate1,798
 3,388
 1,259
 780
 576
Commercial and industrial3,647
 2,142
 1,153
 357
 328
Commercial construction146
 531
 891
 2,463
 1,748
Consumer real estate350
 651
 197
 1,030
 202
Other consumer353
 324
 341
 360
 469
Total6,294
 7,036
 3,841
 4,990
 3,323
Net Charge-offs(59) (8,540) (25,172) (18,155) (37,704)
Provision for loan losses1,715
 8,311
 22,815
 15,609
 29,511
ALL Balance at End of Year:$47,911
 $46,255
 $46,484
 $48,841

$51,387
Net loan charge-offs decreased $19.5$8.5 million to $18.2only $0.1 million, or 0.560.00 percent of average loans for 20112014 as compared to $37.7$8.5 million or 1.110.25 percent of average loans for 2010.2013. The significant decrease in net charge-offs is a result of improvingdue to improved economic conditions and management’s continued focus on workouts with our problem loans in 2011.

2014. Net charge-offs declined in all commercial loan segments compared to 2013. C&I loans had a net recovery of $2.4 million which included a recovery from one borrower for $2.5 million. During 2014, we sold a $3.5 million package of smaller commercial loans, $3.2 million of which were on nonaccrual status, resulting in a charge-off of $1.3 million. We also sold a $4.8 million relationship that resulted in a $1.5 million charge-off, including a $0.8 million CRE charge-off and a $0.7 million construction charge-off.


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The following table summarizes net charge-offs as a percentage of average loans and other ratios:

December 31  2011  2010  2009  2008  2007 

Commercial real estate

   0.55 %   1.42%   3.42%   0.52%   0.04% 

Commercial and industrial

   1.24 %   1.62%   0.62%   0.03%   0.03% 

Commercial construction

   (0.34)%   0.96%   3.74%   0.43%   0.46% 

Consumer real estate

   0.20 %   0.24%   0.50%   0.40%   0.04% 

Other consumer

   0.94 %   1.04%   1.52%   1.35%   0.78% 

Ratio of net charge-offs to average loans outstanding

   0.56 %   1.11%   1.60%   0.31%   0.17% 

Allowance for loan losses as a percentage of total loans

   1.56 %   1.53%   1.75%   1.20%   1.23% 

Allowance for loan losses to total nonperforming loans

   87 %   80%   66%   101%   204% 

Provision for loan losses as a percentage of net loan charge-offs

   86 %   78%   130%   184%   124% 

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ratios as of December 31:

 2014
 2013
 2012
 2011
 2010
Commercial real estate0.01 % 0.08% 0.59% 0.55 % 1.42%
Commercial and industrial(0.26)% 0.07% 0.57% 1.24 % 1.62%
Commercial construction0.32 % 2.72% 5.94% (0.34)% 0.96%
Consumer real estate0.09 % 0.20% 0.28% 0.20 % 0.24%
Other consumer1.19 % 0.99% 0.91% 0.94 % 1.04%
Net charge-offs to average loans outstanding0.00 % 0.25% 0.78% 0.56 % 1.11%
Allowance for loan losses as a percentage of total loans1.24 % 1.30% 1.38% 1.56 % 1.53%
Allowance for loan losses to total nonperforming loans385 % 206% 85% 87 % 80%
Provision for loan losses as a percentage of net loan charge-offsNM
 97% 91% 86 % 78%
NM - percentage not meaningful
An inherent risk to the loan portfolio as a whole is the condition of the local economy. In addition, each loan segment carries with it risks specific to the segment. 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.
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 do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.
Commercial construction loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more risks depending on the type of project and the experience and resources of the developer.
Consumer real estate loans are secured by first and second lien such as home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk of 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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The following is the ALL balance by portfolio segment as of December 31:
 2014 2013 2012 2011 2010
(dollars in thousands)Amount
 
% of
Total

 Amount
 
% of
Total

 Amount
 
% of
Total

 Amount
 
% of
Total

 Amount
 
% of
Total

Commercial real estate$20,164
 42% $18,921
 41% $25,246
 54% $29,804
 61% $30,424
 59%
Commercial and industrial13,668
 28% 14,443
 31% 7,759
 17% 11,274
 23% 9,777
 19%
Commercial construction6,093
 13% 5,374
 12% 7,500
 16% 3,703
 8% 5,905
 11%
Consumer real estate6,333
 13% 6,362
 14% 5,058
 11% 3,166
 6% 3,962
 8%
Other consumer1,653
 4% 1,165
 2% 921
 2% 894
 2% 1,319
 3%
Total$47,911
 100% $46,265
 100% $46,484
 100% $48,841
 100% $51,387
 100%
Significant to our ALL is a higher concentration of commercial loans. At December 31, 2014, approximately 83 percent of the ALL related to the commercial loan portfolio, while commercial loans comprised 75 percent of our loan portfolio. We experienced higher losses in our commercial portfolios compared to our consumer portfolio throughout the economic crisis. The ability of borrowers to repay commercial loans is more dependent upon the success of their business and general economic conditions. Accordingly, the risk of loss may be higher on such loans compared to consumer loans, which have incurred lower losses in our market.
Due to the greater potential for loss within our commercial portfolio, we 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 rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.
The following table summarizes the ALL balance as of December 31:

(dollars in thousands)2014
 2013
 2012
 2011
 2010
Collectively Evaluated for Impairment$47,857
 $46,158
 $44,253
 $43,296
 $47,756
Individually Evaluated for Impairment54
 97
 2,231
 5,545
 3,631
Total Allowance for Loan Losses$47,911
 $46,255
 $46,484
 $48,841
 $51,387
The ALL was $47.9 million, or 1.24 percent of total loans, at December 31, 2014 as compared to $46.3 million, or 1.30 percent of total loans at December 31, 2013. Overall, the total ALL and the composition of the ALL remained relatively consistent with December 31, 2013. Impaired loans decreased $8.9 million, or 17 percent, from December 31, 2013, primarily a result of loan pay downs and charge-offs. New impaired loan formation has been low during 2014 with only $5.8 million of new impaired loans resulting in minimal specific reserves at December 31, 2014. The reserve for loans collectively evaluated for impairment did not change significantly at December 31, 2014 compared to December 31, 2013.While we have been experiencing improvement in our asset quality, we still believe that there is inherent risk within the portfolio and have maintained the level of the reserve relatively consistent with the prior year.
Federal Home Loan Bank and Other Restricted Stock
At December 31, 2014 and 2013, we held FHLB stock of $14.3 million and $12.8 million. This investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Pittsburgh. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon on the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. We reviewed and evaluated the FHLB capital stock for OTTI at December 31, 2014. The FHLB reported improved earnings throughout 2014 compared to 2013 and continues to exceed all capital ratios required. Additionally, we considered that the FHLB has been paying dividends and redeeming excess stock throughout 2014. Accordingly, we believe sufficient evidence exists to conclude that no OTTI exists at December 31, 2014.

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At December 31, 2014 and 2013, we held Atlantic Community Bankers’ Bank, or ACBB, stock of $0.8 million for both years. This investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the investment. Like FHLB stock, members purchase ACBB stock to access the products and services offered, as opposed to traditional equity investors who acquire stock for purposes such as appreciation in value. S&T acquired the ACBB stock as a result of bank acquisitions and does not use the bank’s member services. ACBB continues to be classified as well capitalized by regulatory guidelines and the current purchase price for new members is $3,500 per share. As of December 31, 2014, the book value of ACBB stock was $2,024 per share; therefore, management believes that no OTTI exists at December 31, 2014.
Deposits
Deposits

The following table presents the composition of deposits at December 31:

December 31  2011   2010   $ Change 
(in thousands)            

Noninterest-bearing demand

  $818,686    $765,812    $52,874  

Interest-bearing demand

   283,611     295,246     (11,635) 

Money market

   278,092     262,683     15,409  

Savings

   802,942     753,813     49,129  

Certificates of deposit

   1,152,528     1,239,970     (87,442) 

Total

  $3,335,859    $3,317,524    $18,335  

(dollars in thousands)2014
 2013
 $ Change
Noninterest-bearing demand$1,083,919
 $992,779
 $91,140
Interest-bearing demand333,015
 312,790
 20,225
Money market309,245
 281,403
 27,842
Savings1,027,095
 994,805
 32,290
Certificates of deposit933,210
 922,780
 10,430
Brokered deposits222,358
 167,751
 54,607
Total$3,908,842
 $3,672,308
 $236,534
Deposits are the primary source of funds for us. We believe that our deposit base is stable and that we have the ability to attract new deposits, mitigating aany funding dependency on other more volatile sources. During 2011,Total deposits increased $236.5 million, or 6.4 percent mostly due to strong growth in our customer deposits. Overall, customer deposits increased $181.9 million, or 5.2 percent of total deposits from December 31, 2013. Customer deposit growth included a $91.1, or 9.2 percent, increase in noninterest-bearing demand, deposit accounts increased $52.9 million primarily related to the low interest rate environment, our marketing efforts for newa $20.2, or 6.5 percent, increase in interest-bearing demand, accounts and corporate cash management services. The low interest rate environment also had an impact on our overall deposit mix as customer certificate of deposit maturities shifted toa $27.8, or 9.9 percent, increase in money market, a $32.3, or 3.2 percent, increase in savings and $10.4, or 1.1 percent increase in CDs.
Our brokered deposits increased $54.6 million, or 32.6 percent, compared to December 31, 2013. Included in our brokered deposits are CDs issued through the Certificate of Deposit Account Registry Services, or CDARS and the Depository Trust Company, or DTC. Also included in brokered deposits are money market products.

Certificatesand interest bearing demand funds through the Insured Network Deposits, or IND, program. Brokered deposits are an additional source of depositfunds utilized by ALCO as a way to diversify funding sources, as well as manage the bank's funding costs and structure.

The daily average balance of deposits and rates paid on deposits are summarized for the years ended December 31 in the following table:
 2014 2013 2012
(dollars in thousands)Amount
 Rate
 Amount
 Rate
 Amount
 Rate
Noninterest-bearing demand$1,046,605
   $955,475
   $877,056
  
Interest-bearing demand321,907
 0.02% 309,748
 0.02% 306,994
 0.05%
Money market321,294
 0.16% 319,831
 0.14% 308,719
 0.17%
Savings1,033,482
 0.16% 1,001,209
 0.17% 902,889
 0.26%
Certificates of deposit905,346
 0.79% 980,933
 0.91% 1,093,899
 1.25%
Brokered deposits226,169
 0.34% 73,518
 0.32% 10,363
 0.28%
Total$3,854,803
 0.31% $3,640,714
 0.48% $3,499,920
 0.70%
CDs of $100,000 and over, were 11 percent of total deposits at December 31, 2011 andincluding CDARS, accounted for 12 percent of total deposits at December 31, 2010,2014 and 2013, and primarily represent deposit relationships with local customers in our market area.

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Maturities of certificates of deposit of $100,000 or more outstanding at December 31, 2014, including brokered deposits, are summarized as follows:

December 31  2011 
(in thousands)    

Three months or less

  $159,557  

Over three through six months

   98,607  

Over six through twelve months

   50,745  

Over twelve months

   118,157  

Total

  $427,066  

Through the Promontory Interfinancial Network, LLC, we participate in the Certificate of Deposit Account Registry Services, or CDARS, reciprocal and One-Way Buy programs. We have been a member of Promontory and have utilized CDARS since 2009. Reciprocal deposits provide a stable and cost-effective source of funds with rates generally lower than traditional brokered deposits. Although reciprocal deposits are considered “brokered” under existing law, they tend to act more like core deposits. Reciprocal deposits are customer funds exchanged among insured depository institutions that are member of the CDARS deposit placement service. Through the exchange, we benefit from large, local customer deposits, while providing our customers with access to FDIC insurance protection beyond the maximum deposit insurance amount. Reciprocal deposits address the need to attract and retain valuable customer relationships. As of December 31, 2011 there was $15.0 million in CDARS reciprocal deposits. We also participate in the CDARS One-Way Buy program which allows us to obtain large blocks of wholesale funding, while maintaining control over pricing. Through the One-Way Buy program, funding is effectively purchased from insured depository institutions that are

PAGE 55

  
(dollars in thousands)2014
  
Three months or less$213,566
Over three through six months55,949
Over six through twelve months57,480
Over twelve months151,221
Total$478,216
Borrowings
Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

member of the CDARS deposit placement service. As of December 31, 2011 we had $55.8 million in the CDARS One-Way Buy program.

The daily average amount of deposits and rates paid on such deposits are summarized for the periods indicated in the following table:

   2011  2010  2009 
Years Ended December 31  Amount   Rate  Amount   Rate  Amount   Rate 
(in thousands)                      

Noninterest-bearing demand

  $792,911     $728,708     $637,434    

Interest-bearing demand

   286,588     0.13%   267,291     0.21%   241,123     0.23% 

Money market

   249,497     0.15%   251,092     0.26%   244,619     0.44% 

Savings

   761,274     0.17%   749,325     0.28%   758,216     0.46% 

Certificates of deposit

   1,181,822     1.77%   1,300,803     1.95%   1,367,372     2.44% 

Total

  $3,272,092     0.70%  $3,297,219     0.87%  $3,248,764     1.18% 

Borrowings

The following table represents the composition of borrowings atfor the years ended December 31:

Years Ended December 31  2011   2010   $ Change 
(in thousands)            

Securities sold under repurchase agreements, retail

  $30,370    $40,653    $(10,283) 

Short-term borrowings

   75,000     —     75,000  

Long-term borrowings

   31,874     29,365     2,509  

Junior subordinated debt securities

   90,619     90,619     —  
Total Borrowings  $227,863    $160,637    $67,226  

(dollars in thousands)2014
 2013
 $ Change
Securities sold under repurchase agreements, retail$30,605
 $33,847
 $(3,242)
Short-term borrowings290,000
 140,000
 150,000
Long-term borrowings19,442
 21,810
 (2,368)
Junior subordinated debt securities45,619
 45,619
 —
Total Borrowings$385,666
 $241,276
 $144,390
Borrowings are an additional source of funding for us. Short-term borrowings are for terms under one year and were comprised primarily of REPO, federal funds purchased, term auction facility, or TAF, borrowings and FHLB advances. We define repurchase agreements with our local retail customers as retail REPO. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and are therefore accounted for as a secured borrowing. Federal funds purchased are unsecured overnight borrowings with other financial institutions. TAF borrowings are collateral backed short-term loans with the Federal Reserve. FHLB advances are for various terms secured by a blanket lien on residential mortgages and other real estate secured loans. Long-term borrowings are for terms greater than one year and consist of FHLB borrowings. The purpose of long-term borrowings is to match-fund selected new loan originations, to mitigate interest rate sensitivity risks and to take advantage of discounted borrowing rates through the FHLB for community investment projects. The increase in borrowings of $67.2$144.4 million is primarily within our short-term borrowings. Short-term borrowings and was donewere utilized as a source of funds to maintainsupport our liquidity position afterasset growth during 2014.
Information pertaining to short-term borrowings is summarized in the redemptiontables below:
 Securities Sold Under Repurchase Agreements
(dollars in thousands)2014
 2013
 2012
Balance at December 31$30,605
 $33,847
 $62,582
Average balance during the year28,372
 54,057
 47,388
Average interest rate during the year0.01% 0.12% 0.17%
Maximum month-end balance during the year$40,983
 $83,766
 $62,582
Average interest rate at December 310.01% 0.01% 0.20%
 Short-Term Borrowings
(dollars in thousands)2014
 2013
 2012
Balance at December 31$290,000
 $140,000
 $75,000
Average balance during the year164,811
 101,973
 50,212
Average interest rate during the year0.31% 0.27% 0.24%
Maximum month-end balance during the year$290,000
 $175,000
 $75,000
Average interest rate at December 310.30% 0.30% 0.19%

50
Table of the preferred stock in December of 2011.

During 2011,Contents


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued


Information pertaining to long-term borrowings increased $2.5is summarized in the tables below:
 Long-Term Borrowings
(dollars in thousands)2014
 2013
 2012
Balance at December 31$19,442
 $21,810
 $34,101
Average balance during the year20,571
 24,312
 33,841
Average interest rate during the year3.00% 3.07% 3.26%
Maximum month-end balance during the year$21,616
 $28,913
 $40,669
Average interest rate at December 312.97% 3.01% 3.17%
 Junior Subordinated Debt Securities
(dollars in thousands)2014
 2013
 2012
Balance at December 31$45,619
 $45,619
 $90,619
Average balance during the year45,619
 65,989
 90,619
Average interest rate during the year2.68% 3.14% 3.21%
Maximum month-end balance during the year$45,619
 $90,619
 $90,619
Average interest rate at December 312.70% 2.70% 3.01%
During 2014, long-term borrowings decreased $2.4 million as compared to December 31, 2010.2013 due to normal amortization of these borrowings. At December 31, 2011, we had2014, our long-term borrowings outstanding of $28.8$19.4 million outstandingincluded $16.3 million that were at a fixed rate and $3.1 million$3.1million at a variable rate.

During the third quarter of 2006, we issued $25.0 million of junior subordinated debentures through a pooled transaction at an initial fixed rate of 6.78 percent. Beginning September 15, 2011 and quarterly thereafter, we have had the option to redeem the subordinated debt, subject to a 30 day written notice and prior approval by the FDIC. We chose not to exercise the option for early

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

redemption on September 15, 2011 and theThe subordinated debt converted to a variable rate of 3-month LIBOR plus 160 basis points.points in September of 2011. The subordinated debt qualifies as Tier 2 capital under regulatory guidelines and will mature on December 15, 2036.

During the first quarter of 2008, we completed a private placement to a financial institution of $20.0 million of floating rate trust preferred securities. The trust preferred securities mature in March 2038, are callable at our option after five years bearand had an interest rate initially at a rate of 6.44 percent per annum and quarterly adjustadjusts with the three-month LIBOR plus 350 basis points. We began making interest payments to the trustee on June 15, 2008 and quarterly thereafter. The trust preferred securities qualify as Tier 1 capital under regulatory guidelines. To issue these trust preferred securities, we formed STBA Capital Trust I, or the Trust, with $0.6 million of equity, which is owned 100 percent by us. The proceeds from the sale of the trust preferred securities and the issuance of common equity were invested in junior subordinated debt, which is the sole asset of the Trust. The Trust pays dividends on the trust preferred securities at the same rate as the distributioninterest we paidpay on the junior subordinate debt held by the Trust. SinceBecause the third-party investors are the primary beneficiaries, the Trust qualifies as a variable interest entity, or VIE, but is not consolidated in our financial statements.

During the second quarter of 2008, we issued $20.0 million of junior subordinated debt through a private placement with three financial institutions at an initial rate of 6.40 percent that floats quarterly with 3-month LIBOR plus 350 basis points. IfThe subordinated debt qualified as Tier 2 Capital under regulatory guidelines, but if all or any portion of the subordinated debt ceasesceased to be deemed Tier 2 Capital due to a change in applicable capital regulations, we will havehad the right to redeem, on any interest payment date, subject to a 30 day written notice and prior approval by the FDIC, the subordinated debt at the applicable redemption rate. The redemption rate which startsstarted at a high of 102.82 percent at June 15, 2009 and decreasesdecreased yearly to 100 percent on June 15, 2013 and thereafter could be called. We received approval from the FDIC to redeem early, and can be called after five years.we did so on June 17, 2013. The subordinated debt qualifies as Tier 2 capital under regulatory guidelines and will maturewould have matured on June 15, 2018.

Also during the second quarter of 2008, we issued $25.0 million of junior subordinated debt through a private placement with a financial institution at an initial rate of 5.15 percent that floats quarterly with 3-month LIBOR plus 250 basis points. At any time after May 30, 2013, we will havehad the right to redeem all or a portion of the subordinated debt, subject to a 30-day written notice and prior approval by the FDIC. The subordinated debt qualifiesqualified as Tier 2 capital under regulatory guidelines and will maturewould have matured on May 30, 2018.

Information pertaining However, we received approval by the FDIC to REPO, federal funds purchasedredeem this junior subordinated debt early, and TAF borrowings is summarized in the table below:

    2011  2010  2009 
(in thousands)          

Balance at December 31

  $30,370   $40,653   $44,935  

Average balance during the year

   41,584    46,489    94,019  

Average interest rate during the year

   0.13%   0.14%   0.17% 

Maximum month-end balance during the year

  $42,409   $52,046   $129,835  

Average interest rate at December 31

   0.11%   0.07%   0.14% 

PAGE 57

redeemed it also on June 17, 2013.

We chose to redeem $45.0 million of junior subordinated debt early not only because of its diminishing regulatory capital benefit, but also for a future positive impact on net interest income.

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —-- continued

Information pertaining to FHLB advances is summarized in the table below:

    2011  2010  2009 
(in thousands)          

Balance at December 31

  $75,000   $—   $51,300  

Average balance during the year

   551    32,473    96,929  

Average interest rate during the year

   0.32%   0.45%   0.54% 

Maximum month-end balance during the year

  $75,000   $141,800   $195,150  

Average interest rate at December 31

   0.18%   —    0.62% 



Wealth Management Assets

As of December 31, 2011,2014, the fair value of the S&T Bank wealth managementWealth Management assets under management and administration, or AUM, which are not accounted for as part of our assets, increased to $1.5$2.0 billion from $1.4$1.9 billion in the prior year. Assets under management and administrationas of $1.5 billionDecember 31, 2013. AUM consist of $1.1 billion in S&T Trust, and $0.4$0.6 billion in S&T Financial Services.Services and $0.3 billion in Stewart Capital Advisors. The increase in 20112014 is primarily attributable to the improved performance of the U.S. and global capital markets.

markets and new business.


Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with GAAP, our management uses, and this Annual Report contains or references, certain non-GAAP financial measures, such as net interest income on a fully taxable-equivalentFTE basis, operating revenue and the efficiency ratio. We believe these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends as they facilitate comparisons with the performance of othersother companies in the financial services industry. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor is it necessarily comparable with non-GAAP measures which may be presented by other companies.

We believe the presentation of net interest income on a fully taxable-equivalentFTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income per the Consolidated Statements of Net Income is reconciled to net interest income adjusted to a fully taxable-equivalentFTE basis on pages 3327 and 39.

33.

Operating revenue is the sum of net interest income andplus noninterest income, lessexcluding security gains/losses.losses and non-recurring income and expenses. In order to understand the significance of net interest income to our business and operating results, we believe it is appropriate to evaluate the significance of net interest income as a component of operating revenue.

The efficiency ratio is recurring noninterest expense divided by recurring noninterest income plus net interest income, on a fully taxable-equivalentFTE basis, which ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Common return on average tangible assets, common return on average tangible common equity and the ratio of tangible common equity to tangible assets exclude goodwill, other intangible assets and preferred equity in order to show the significance of the tangible elements of our assets and common equity. Total assets and total average assets are reconciled to total tangible assets and total tangible average assets on page19. Total shareholders equity and total average shareholders equity are also reconciled to total tangible common equity and total tangible average common equity on page 20. These measures are consistent with industry practice.

Capital Resources

Shareholders’ equity decreased $88.2increased $37.1 million, or 6.0 percent, to $490.5$608.4 million at December 31, 20112014 compared to $578.7$571.3 million at December 31, 2010.2013. The significant decreaseincrease in shareholders’ equity is primarily due to the redemptionaddition of the preferred$35.9 million in retained earnings, comprised of net income of $57.9 million reduced by common stock dividends of $108.7 million that we issued on January 16, 2009 in conjunction with our participation in the CPP. Further decreasing equity was $5.1 million of dividends related to the preferred stock.$20.2 million. Included in other comprehensive income/lossincome (loss) was a decline

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

decrease of $12.2$1.1 million due to the adjustment in the funded status of ourthe employee benefit plans as a result of a significantoffset by the change in unrealized gains on securities available-for-sale, both due to the decline in interest rates at the discount rate used to calculate our liability. We paid dividends to our common shareholdersend of $16.9 million during 2011 and had net income available to common shareholders of $39.7.

the year.

We continue to maintain a strong capital position with a leverage ratio of 9.179.80 percent as compared to the regulatory guideline of 5.00 percent to be well capitalized. Our risk-based capital Tier 1 and Total capital ratios were 11.6312.34 percent and 15.2014.27 percent respectively, at December 31, 2011,2014, which places us significantly above the Federal Reserve Board’sfederal bank regulatory agencies’ “well capitalized” guidelines of 6.00 percent and 10.00 percent for Tier 1 and Total capital. We believe that we have sufficient cash flow, including cash and cash equivalents, and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity. We believe that we have the ability to raise additional capital, if necessary.

In August 2009,July of 2013, the U.S. federal banking agencies issued a joint final rule that implements the Basel III capital standards
effective January 1, 2015 with a phase-in period ending January 1, 2019. The final rule establishes the minimum capital levels required under the Dodd-Frank Act, permanently grandfathers trust preferred securities issued before May 19, 2010 and
increases the capital required for certain categories of assets. We have evaluated the impact of the Basel III final capital rule and
anticipate that our regulatory capital ratios will continue to exceed the well-capitalized minimum requirements.
In October 2012, we filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, with the SEC for the issuance of up to $300.0 million of a variety of securities including, debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the saleissuance of any securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to, our subsidiaries, possible acquisitions and stock repurchases. As of December 31, 2011,2014, we had not issued any securities pursuant to the shelf registration statement.


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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued


Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we cannot reasonably predict future payments. We have various financial obligations, including contractual obligations and commitments that may require future cash payments.

The following table presents as of December 31, 2011,2014, significant fixed and determinable contractual obligations to third parties by payment date:

   Payments Due In 
    2012   2013-2014   2015-2016   Later Years   Total 
(in thousands)                    

Deposits without a stated maturity(1)

  $2,183,331    $—    $—    $—    $2,183,331  

Certificates of deposit(1)

   706,140     306,058     129,823     10,507     1,152,528  

Securities sold under repurchase agreements(1)

   30,370     —     —     —     30,370  

Short-term borrowings(1)

   75,000     —     —     —     75,000  

Long-term borrowings(1)

   1,818     13,841     3,886     12,329     31,874  

Junior subordinated debt securities(1)

   —     —     —     90,619     90,619  

Operating and capital leases

   1,624     3,297     3,270     33,450     41,641  

Purchase obligations

   9,124     12,862     12,988     —     34,974  

Total

  $3,007,407    $336,058    $149,967    $146,905    $3,640,337  
 Payments Due In
(dollars in thousands)2015
 2016-2017
 2018-2019
 Later Years
 Total
Deposits without a stated maturity(1)
$2,822,725
 $—
 $—
 $—
 $2,822,725
Certificates of deposit(1)
628,889
 373,779
 75,434
 8,015
 1,086,117
Securities sold under repurchase agreements(1)
30,605
 —
 —
 —
 30,605
Short-term borrowings(1)
290,000
 —
 —
 —
 290,000
Long-term borrowings(1)
2,399
 4,742
 5,010
 7,291
 19,442
Junior subordinated debt securities(1)
—
 —
 —
 45,619
 45,619
Operating and capital leases2,350
 4,530
 4,452
 41,039
 52,371
Purchase obligations11,326
 21,772
 23,188
 —
 56,286
Total$3,788,294
 $404,823
 $108,084
 $101,964
 $4,403,165
(1)

(1)Excludes interest

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

Operating lease obligations represent short and long-term lease arrangements as described in Part II, Item 8, Note 9 Premises and Equipment, in the Notes to Consolidated Financial Statements. Purchase obligations primarily represent obligations under agreement with our third party data processing servicer and communications charges as described in Part II, Item 8, Note 16 Commitments and Contingencies.

Contingencies, of this Report.

Off-Balance Sheet Arrangements

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. SinceBecause many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.

The following table sets forth the commitments and letters of credit for the periods stated:

December 31  2011   2010 
(in thousands)        

Commitments to extend credit

  $816,160    $836,042  

Standby letters of credit

   119,576     135,489  

Total

  $935,736    $971,531  

as of December 31:

(dollars in thousands)2014
 2013
Commitments to extend credit$1,158,628
 $1,038,529
Standby letters of credit73,584
 78,639
Total$1,232,212
 $1,117,168
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.

Our allowance for unfunded commitments is determined using a methodology similar to that used to determine the ALL. Amounts are added to the allowance for unfunded commitments through a charge to current earnings in noninterest expense. The balance in the allowance for unfunded commitments decreased slightly$0.6 million to $1.2$2.3 million at December 31, 2011 as2014 compared to $2.7$2.9 million at December 31, 20102013. The decrease is due to a decreasethe continued improvement in the volumeasset quality.


53
Table of commitments in 2011.

Contents


Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued


Liquidity

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. Liquidity risk management involves monitoring and maintaining sufficient levels of a diverse set of funding sources that are available for normal operations and for unanticipated stress events. In order to manage liquidity risk our Board of Directors has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management.management for S&T and S&T Bank. ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet our funding needs in both a normal operating environment and for potential liquidity stress events.

ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. ALCO policy guidelines are in place that define graduated risk tolerances. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.

Our primary funding and liquidity source is a stable customer deposit base. We believe that the bankS&T Bank has the ability to retain existing and attract new deposits, mitigating aany funding dependency on other more volatile sources. Refer to the Deposits Section of this Part II, Item 7, MD&A, for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various funding sources that can be used as part of our normal funding program when either a structure or cost

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — continued

efficiency has been identified. These funding sources include a cushion of highly liquid assets, borrowing availability at the FHLB, Federal Funds lines with other financial institutions and access to the brokered certificatesdeposit market.

An important component of deposit market including CDARs.

Since the beginning of the financial industry crisis in 2008, monitoring and maintaining appropriate liquidity levels has become a focus of regulators, bankers and investors. ALCO has enhanced the measurement, monitoring and reporting systems for liquidity risk management forS&T’s ability to effectively respond to potential liquidity stress events. Specific focus has been onevents is maintaining an adequate levela cushion of asset liquidity, performing short-termhighly 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 long-term stress testshigh. At December 31, 2014 S&T Bank had $393.6 million in highly liquid assets, which consisted of $56.4 million in interest-bearing deposits with banks, $334.2 million in unpledged securities and developing a more detailed contingency funding plan. We also work$3.0 million in loans held for sale. The highly liquid assets to ensure access to various wholesale funding sources is available, eventotal assets resulted in a stress event.

ALCO uses a variety of ratios and reports to monitor our liquidity position. ALCO monitors an asset liquidity ratio which is defined asof 8.0 percent at December 31, 2014. Also, at December 31, 2014, we had a remaining borrowing availability of $1.3 billion with the sumFHLB of interest-bearing deposits with banks, unpledged securities and loans held for sale to total assets. During 2011, our asset liquidity has improved as loans decreased and deposits remained relatively stable.Pittsburgh. In addition, we have access to $60 million in Federal Funds lines with other financial institutions. Refer to Part II, Item 8, Notes 14 and 15 Short-term and Long-term borrowings, and the asset liquidity ratio, ALCO reviews cash flow projections,Borrowings section of this Part II, Item 7, MD&A, for more details on FHLB borrowings. S&T Bank is considered to be a liquidity coverage ratio and various balance sheet liquidity ratios. ALCO policy guidelines are in place for each ratio that defines graduated risk tolerance levels. If a ratio moveswell capitalized bank according to high risk, specific actions are defined, such as increased monitoring or the development of an action planregulatory guidance, therefore access to reduce the risk position.

brokered CDs is not restricted.


Inflation

Management is aware of the significant effect inflation has on interest rates and can have on financial performance. Our ability to cope with this is best determined by analyzing our capability to respond to changing interest rates and our ability to manage noninterest income and expense. We monitor the mix of interest-rate sensitive assets and liabilities through ALCO in order to reduce the impact of inflation on net interest income. We also control the effects of inflation by reviewing the prices of our products and services, by introducing new products and services and by controlling overhead expenses.


54
Table of Contents



Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can adversely affect a financial institution’s earnings or capital. For most financial institutions, including S&T, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes affect capital by changing the net present value of a bank’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value. However, excessive interest rate risk can threaten a bank’s earnings, capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by ALCO. ALCO monitors and manages interest rate sensitivitymarket risk through gap, rate shock analyses, simulations and economic value of equity, or EVE, analysis and by performing stress tests in order to avoid unacceptablemitigate earnings and market value fluctuations due to interest rate changes. Our gap model includes certain management assumptions based upon past experience and the expected behavior of customers. The assumptions include principal prepayments for fixed rate loans, collateralized mortgage obligations and mortgage-backed securities and classifying the demand, money market and savings balances by degree of interest rate sensitivity.

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — continued

The gap and cumulative gap represent the net position of assets and liabilities subject to repricingchanges in specific time periods, as measured by a ratio of rate sensitive assets to rate sensitive liabilities. The table below shows the amount and timing of repricing assets and liabilities as of December 31, 2011.

   GAP 
    1-6 Months   7-12 Months   13-24 Months   >2 Years 
(in thousands)                

Repricing Assets:

        

Cash and due from banks including interest-bearing deposits

  $208,854    $—    $—    $61,672  

Securities available-for-sale

   51,109     42,260     60,195     204,032  

Loans, net

   1,511,960     274,896     444,113     852,799  

Federal Home Loan Bank stock, at cost

   —     —     —     18,216  

Other assets

   —     —     —     389,888  

Total Assets

  $1,771,923    $317,156    $504,308    $1,526,607  

Repricing Liabilities:

        

Noninterest-bearing demand

  $—    $—    $—    $818,686  

Interest-bearing demand

   35,451     35,451     70,903     141,806  

Money market

   278,092     —     —     —  

Savings

   540,131     37,544     75,089     150,178  

Certificates of deposit

   531,783     174,349     218,077     228,319  

Securities sold under repurchase agreements and short-term borrowings

   80,370     25,000     —     —  

Long-term borrowings and junior subordinated debt securities

   94,620     917     11,885     15,071  

Other liabilities and shareholders’ equity

   —     —     —     556,272  

Total Liabilities and Shareholders’ Equity

   1,560,447     273,261     375,954     1,910,332  

GAP

   211,476     43,895     128,354     (383,725) 

Cumulative GAP

  $211,476    $255,371    $383,725    $—  

Rate Sensitive Assets / Rate Sensitive Liabilities  December 31, 2011   December 31, 2010 

Cumulative 6 Months

   1.14     1.25  

Cumulative 12 Months

   1.14     1.18  

Our one-year repricing gap at December 31, 2011 indicates an asset sensitive position. This means that more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive position will differ depending upon the change in market interest rates. For example, with an asset sensitive position in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in interest rate spreads, net interest income and operating income. Conversely, with an asset sensitive position in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in interest rate spreads, net interest income and operating income.

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — continued

In addition to the gap analysis, we perform rate

Rate shock analyses onresults are compared to a static balance sheetbase case to provide an estimate of the effectimpact that specific interestmarket rate changes wouldmay have on 12 months of pretax net interest income. The base case and rate shock analyses are performed on a static balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift of +/-300 basis points in market interest rates. We have modified assumptions in the -300 basis point rate shock analysis due to the very low level of interest rates. Rate shock analysesrates and also incorporateinclude management assumptions regarding the levelimpact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of fixed rate loans and securities with optionality. Inclusion of these assumptions makes rate shock analyses more useful than gap analysis alone. OurS&T policy guidelines limit the change in pretax net interest income over a one-year12 month horizon using rate shocks up toof +/- 300 basis points. Policy guidelines define the percent change in pretax net interest income by graduated risk tolerance levels.

The table below showslevels of minimal, moderate and high. We have temporarily suspended the percent change to pretax net interest income with a rate shock of +/- 300 basis points.

    +300 bps   -300 bps 

December 31, 2011

   11.34%     (8.85)%  

December 31, 2010

   11.67%     (10.76)%  

The impact to pretax net interest income in the +/-300 basis point rate shocks for December 31, 2011 is consistent with having an asset sensitive balance sheet. The +300 basis point rate shock results are relatively unchanged when comparing December 31, 2011 to December 31, 2010. The-200 and -300 basis point rate shock results have improved because a flattened yield curve has caused more loansanalyses. Due to repricethe low interest rate environment we believe the impact to their floors, mitigating any further downward repricing.

net interest income when evaluating the -200 and -300 basis point rate shock scenarios does not provide meaningful insight into our interest rate risk position.

In order to monitor interest rate risk beyond the one-year12 month time horizon of rate shocks, we also perform EVE analysis. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE rate change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analysis, EVE incorporates management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and core depositthe behavior and value. We measurevalue of non-maturity deposit products. S&T policy guidelines limit the change in EVE using shocks up togiven changes in rates of +/- 300 basis points. Policy guidelines define the percent change in EVE by graduated risk tolerance levels. The December 31, 2011 results reflect a 20.86 percent increaselevels of minimal, moderate and 15.11 percent decrease tohigh. We have also temporarily suspended the EVE given a +300-200 and –300-300 basis point scenarios due to the low interest rate environment.
The table below reflects the rate shock analyses and EVE results. Both are in the minimal risk tolerance level.
 December 31, 2014 December 31, 2013
Change in Interest
Rate (basis points)
% Change in Pretax
Net Interest Income

% Change in
Economic Value of Equity

 
% Change in Pretax
Net Interest Income

% Change in
Economic Value of Equity

3006.7
1.8
 7.6
(6.1)
2004.1
3.9
 5.3
(2.1)
1001.8
3.5
 2.3
—
(100)(3.4)(12.3) (3.4)(10.8)
The results from the rate shock analyses are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive balance sheet will differ depending upon the change in market interest rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in net interest income and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in net interest income and operating income. As measured by rate shock analyses, an increase in interest rates respectively.

PAGE 63

would have a positive impact on pretax net interest income. However, there was a slight decline in the percent change in pretax net interest income for our rates up shock scenarios when comparing December 31, 2014 and December 31, 2013. The decline is a result of utilizing short term funding to support the asset growth during 2014.

When comparing the EVE results for December 31, 2014 and December 31, 2013, the percent change to EVE has improved in the rates up shock scenarios and decreased in the rate down shock scenario. The changes in EVE are due to lower long-term rates at December 31, 2014 compared to December 31, 2013. The lower long-term rates resulted in lower values of

55
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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued


our non-maturity deposits in the 2014 base case due to the narrowing gap between the market funding rate and our non-maturity deposit rates. With a lower base case, the rates up shock scenarios reflect a greater improvement in the value of our non-maturity deposits. The improvement in the value of our non-maturity deposit values when comparing the rates up shock scenarios in 2014 to 2013 resulted in an improved EVE. The lower base case also impacted the rate down scenario but due to the overall low interest rate environment the impact was not as material.
In addition to rate shocks and EVE, we perform a market risk stress test annually. The market risk stress test includes sensitivity analyses and simulations. Sensitivity analyses are performed to help us identify which model assumptions cause the greatest impact on pretax net interest income. Sensitivity analyses may include changing prepayment behavior of fixed rate loans and securities with optionality and the impact of interest rate changes on non-maturity deposit products. Simulation analyses may include the potential impact of rate shocks other than the policy guidelines of +/- 300 basis points, yield curve shape changes, significant balance mix changes and various growth scenarios. Simulations indicate that an increase in rates, particularly if the yield curve steepens, will most likely result in an improvement in pretax net interest income. We realize that some of the benefit reflected in our scenarios may be offset by a change in the competitive environment and a change in product preference by our customers.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

Consolidated Balance Sheets

57
65 

Consolidated Statements of Net Income

58
66 
Consolidated Statements of Comprehensive Income
59

Consolidated Statements of Changes in Shareholders’ Equity

60
67 

Consolidated Statements of Cash Flows

61
68 

Notes to Consolidated Financial Statements

63
69 

Report of KPMG LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting

114
124 

Report of KPMG LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements

115125

PAGE 64


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CONSOLIDATED BALANCE SHEETS

S&T Bancorp, Inc. and Subsidiaries

December 31 2011  2010 
(in thousands, except share and per share data)      

ASSETS

  

Cash and due from banks, including interest-bearing deposits of $208,854 and $61,260 in 2011 and 2010, respectively

 $270,526   $108,196  

Securities available-for-sale, at fair value

  357,596    288,025  

Loans held for sale

  2,850    8,337  

Portfolio loans, net of unearned income of $715 and $973

  3,129,759    3,355,590  

Allowance for loan losses

  (48,841)   (51,387) 

Portfolio loans, net

  3,080,918    3,304,203  

Bank owned life insurance

  56,755    54,924  

Premises and equipment, net

  37,755    39,954  

Federal Home Loan Bank stock, at cost

  18,216    22,365  

Goodwill

  165,273    165,273  

Other intangibles, net

  5,728    7,465  

Other assets

  124,377    115,597  

Total Assets

 $4,119,994   $4,114,339  

LIABILITIES

  

Deposits:

  

Noninterest-bearing demand

 $818,686   $765,812  

Interest-bearing demand

  283,611    295,246  

Money market

  278,092    262,683  

Savings

  802,942    753,813  

Certificates of deposit

  1,152,528    1,239,970  

Total Deposits

  3,335,859    3,317,524  

Securities sold under repurchase agreements

  30,370    40,653  

Short-term borrowings

  75,000    —  

Long-term borrowings

  31,874    29,365  

Junior subordinated debt securities

  90,619    90,619  

Other liabilities

  65,746    57,513  

Total Liabilities

  3,629,468    3,535,674  

SHAREHOLDERS’ EQUITY

  

Fixed rate cumulative perpetual preferred stock, series A, no par value, $1,000 per share liquidation preference

Preferred stock authorized—10,000,000 shares

Issued and outstanding—0 shares and 108,676 shares

  —    106,137  

Common stock ($2.50 par value)

Authorized—50,000,000 shares

Issued—29,714,038 shares

Outstanding—28,131,249 shares and 27,951,689 shares

  74,285    74,285  

Additional paid-in capital

  52,637    51,570  

Retained earnings

  421,468    401,734  

Accumulated other comprehensive loss

  (14,108)   (6,334) 

Treasury stock (1,582,789 shares and 1,762,349 shares, at cost)

  (43,756)   (48,727) 

Total Shareholders’ Equity

  490,526    578,665  

Total Liabilities and Shareholders’ Equity

 $4,119,994   $4,114,339  

 December 31,
(dollars in thousands, except share and per share data)2014 2013
ASSETS   
Cash and due from banks, including interest-bearing deposits of $57,048 and $53,594 at December 31, 2014 and 2013$109,580
 $108,356
Securities available-for-sale, at fair value640,273
 509,425
Loans held for sale2,970
 2,136
Portfolio loans, net of unearned income3,868,746
 3,566,199
Allowance for loan losses(47,911) (46,255)
Portfolio loans, net3,820,835
 3,519,944
Bank owned life insurance62,252
 60,480
Premises and equipment, net38,166
 36,615
Federal Home Loan Bank and other restricted stock, at cost15,135
 13,629
Goodwill175,820
 175,820
Other intangible assets, net2,631
 3,759
Other assets97,024
 103,026
Total Assets$4,964,686
 $4,533,190
LIABILITIES   
Deposits:   
Noninterest-bearing demand$1,083,919
 $992,779
Interest-bearing demand335,099
 312,790
Money market376,612
 281,403
Savings1,027,095
 994,805
Certificates of deposit1,086,117
 1,090,531
Total Deposits3,908,842
 3,672,308
Securities sold under repurchase agreements30,605
 33,847
Short-term borrowings290,000
 140,000
Long-term borrowings19,442
 21,810
Junior subordinated debt securities45,619
 45,619
Other liabilities61,789
 48,300
Total Liabilities4,356,297
 3,961,884
SHAREHOLDERS’ EQUITY   
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—31,197,365 shares at December 31, 2014 and 2013
Outstanding—29,796,397 shares at December 31, 2014 and 29,737,725 shares at December 31, 2013
77,993
 77,993
Additional paid-in capital78,818
 78,140
Retained earnings504,060
 468,158
Accumulated other comprehensive income (loss)(13,833) (12,694)
Treasury stock (1,400,968 shares at December 31, 2014 and 1,459,640 shares at December 31, 2013, at cost)(38,649) (40,291)
Total Shareholders’ Equity608,389
 571,306
Total Liabilities and Shareholders’ Equity$4,964,686
 $4,533,190
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF NET INCOME

S&T Bancorp, Inc. and Subsidiaries

Years Ended December 31  2011  2010   2009 
(in thousands, except per share data)           

INTEREST INCOME

     

Loans, including fees

  $154,121   $169,404    $179,774  

Investment Securities:

     

Taxable

   8,169    7,685     11,020  

Tax-exempt

   2,347    2,830     3,655  

Dividends

   442    500     638  

Total Interest Income

   165,079    180,419     195,087  

INTEREST EXPENSE

     

Deposits

   22,952    28,717     38,438  

Short-term borrowings

   55    210     686  

Long-term borrowings and junior subordinated debt securities

   4,726    5,646     9,981  

Total Interest Expense

   27,733    34,573     49,105  

NET INTEREST INCOME

   137,346    145,846     145,982  

Provision for loan losses

   15,609    29,511     72,354  

Net Interest Income After Provision for Loan Losses

   121,737    116,335     73,628  

NONINTEREST INCOME

     

Security (losses) gains, net

   (124)   274     (5,088) 

Debit and credit card fees

   10,889    9,954     6,921  

Service charges on deposit accounts

   9,978    11,178     12,344  

Insurance fees

   8,314    8,312     7,751  

Wealth management fees

   8,180    7,808     7,500  

Mortgage banking

   1,199    3,403     2,727  

Other

   5,621    6,281     6,425  

Total Noninterest Income

   44,057    47,210     38,580  

NONINTEREST EXPENSE

     

Salaries and employee benefits

   51,078    48,715     48,848  

Net occupancy

   6,943    6,928     6,819  

Data processing

   6,853    6,145     6,048  

Professional services and legal

   5,437    6,889     4,220  

Furniture and equipment

   4,941    5,054     4,991  

FDIC assessment

   3,570    5,426     8,388  

Other taxes

   3,381    3,432     3,733  

Joint venture amortization

   3,302    2,573     4,393  

Marketing

   3,019    2,795     2,751  

Other

   15,384    17,676     17,935  

Total Noninterest Expense

   103,908    105,633     108,126  

Income Before Taxes

   61,886    57,912     4,082  

Provision (benefit) for income taxes

   14,622    14,432 ��   (3,869) 

Net Income

   47,264    43,480     7,951  

Preferred stock dividends and discount amortization

   7,611    6,201     5,913  

Net Income Available to Common Shareholders

  $39,653   $37,279    $2,038  

Earnings per common share—basic

  $1.41   $1.34    $0.07  

Earnings per common share—diluted

   1.41    1.34     0.07  

Dividends declared per common share

   0.60    0.60     0.61  

 Years ended December 31,
(dollars in thousands, except per share data)2014 2013 2012
INTEREST INCOME     
Loans, including fees$147,293
 $142,492
 $145,181
Investment Securities:     
Taxable8,983
 7,478
 7,544
Tax-exempt3,857
 3,401
 3,121
Dividends390
 385
 405
Total Interest Income160,523
 153,756
 156,251
INTEREST EXPENSE     
Deposits10,128
 11,406
 16,796
Borrowings and junior subordinated debt securities2,353
 3,157
 4,228
Total Interest Expense12,481
 14,563
 21,024
NET INTEREST INCOME148,042
 139,193
 135,227
Provision for loan losses1,715
 8,311
 22,815
Net Interest Income After Provision for Loan Losses146,327
 130,882
 112,412
NONINTEREST INCOME     
Securities gains, net41
 5
 3,016
Wealth management fees11,343
 10,696
 9,808
Debit and credit card fees10,781
 10,931
 11,134
Service charges on deposit accounts10,559
 10,488
 9,992
Insurance fees5,955
 6,248
 6,131
Gain on sale of merchant card servicing business—
 3,093
 —
Mortgage banking917
 2,123
 2,878
Other6,742
 7,943
 8,953
Total Noninterest Income46,338
 51,527
 51,912
NONINTEREST EXPENSE     
Salaries and employee benefits60,442
 60,847
 57,920
Data processing8,737
 8,263
 7,326
Net occupancy8,211
 8,018
 7,603
Furniture and equipment5,317
 4,883
 5,262
Professional services and legal3,717
 4,184
 4,610
Marketing3,316
 2,929
 3,206
Other taxes2,905
 3,743
 3,200
FDIC insurance2,436
 2,772
 2,926
Merger related expenses689
 838
 5,968
Other21,470
 20,915
 24,842
Total Noninterest Expense117,240
 117,392
 122,863
Income Before Taxes75,425
 65,017
 41,461
Provision for income taxes17,515
 14,478
 7,261
Net Income Available to Common Shareholders$57,910
 $50,539
 $34,200
Earnings per common share—basic$1.95
 $1.70
 $1.18
Earnings per common share—diluted$1.95
 $1.70
 $1.18
Dividends declared per common share$0.68
 $0.61
 $0.60
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
S&T Bancorp, Inc. and Subsidiaries
 Years ended December 31,
(dollars in thousands)2014 2013 2012
Net Income$57,910
 $50,539
 $34,200
Other Comprehensive Income (Loss), Before Tax:     
Net change in unrealized gains (losses) on securities
available-for-sale
11,825
 (16,928) 4,097
Net available-for-sale securities gains reclassified
into earnings
(41) (5) (3,016)
Adjustment to funded status of employee benefit plans(13,394) 18,299
 (271)
Other Comprehensive Income (Loss), Before Tax(1,610) 1,366
 810
Income tax benefit (expense) related to items of other comprehensive income471
 (478) (284)
Other Comprehensive Income (Loss), After Tax(1,139) 888
 526
Comprehensive Income$56,771
 $51,427
 $34,726
See Notes to Consolidated Financial Statements


59
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

S&T Bancorp, Inc. and Subsidiaries

   Comprehensive
Income		  Preferred
Stock		  Common
Stock		  Additional
Paid-in
Capital		  Retained
Earnings		  Accumulated
Other
Comprehensive
Income (Loss)		  Treasury
Stock		  Total 
(in thousands, except share and per share data)                        

Balance at December 31, 2008

  $—   $74,285   $43,327   $402,608   $(13,986)  $(57,540)  $448,694  

Net income for 2009

 $7,951       7,951      7,951  

Other Comprehensive Income

Change in unrealized losses on securities available-for-sale, net of tax of ($267)

  (496)       (496)    (496) 

Reclassification adjustment for net gains/losses on securities available-for-sale included in net income, net of tax of $1,782

  3,306        3,306     3,306  

Adjustment to funded status of employee benefit plans, net of tax of ($2,672)

  4,962        4,962     4,962  

Total Comprehensive Income

 $15,723         

Preferred stock dividends and discount amortization

   706      (5,913)     (5,207) 

Cash dividends declared ($0.61 per share)

      (16,869)     (16,869) 

Treasury stock issued (113,626 shares)

     2,867    (4,659)    3,141    1,349  

Recognition of restricted stock compensation expense

     465       465  

Tax benefit from stock-based compensation

     4       4  

Recognition of nonstatutory stock option compensation expense

     483       483  

Issuance of preferred stock(1)

   104,664         104,664  

Warrant for common stock issuance(1)

              4,012                4,012  

Balance at December 31, 2009

  $105,370   $74,285   $51,158   $383,118   $(6,214)  $(54,399)  $553,318  

Net income for 2010

 $43,480       43,480      43,480  

Other Comprehensive Income

        

Change in unrealized gains on securities available-for-sale, net of tax of $243

  452        452     452  

Reclassification adjustment for net gains/losses on securities available-for-sale included in net income, net of tax of ($96)

  (178)       (178)    (178) 

Adjustment to funded status of employee benefit plans, net of tax of $212

  (394)       (394)    (394) 

Total Comprehensive Income

 $43,360         

Preferred stock dividends and discount amortization

   767      (6,201)     (5,434) 

Cash dividends declared ($0.60 per share)

      (16,683)     (16,683) 

Treasury stock issued (205,135 shares)

      (1,980)    5,672    3,692  

Recognition of restricted stock compensation expense

     470       470  

Tax benefit from stock-based compensation

     46       46  

Forfeitures of nonstatutory stock options
(11,000 shares)

              (104)               (104) 

Balance at December 31, 2010

  $106,137   $74,285   $51,570   $401,734   $(6,334)  $(48,727)  $578,665  

Net income for 2011

 $47,264       47,264      47,264  

Other Comprehensive Income

        

Change in unrealized gains on securities available-for-sale, net of tax of $2,346

  4,356        4,356     4,356  

Reclassification adjustment for net gains/losses on securities available-for-sale included in net income, net of tax of $43

  81        81     81  

Adjustment to funded status of employee benefit plans, net of tax of $6,576

  (12,211)       (12,211)    (12,211) 

Total Comprehensive Income

 $39,490         

Redemption of preferred stock

   (108,676)        (108,676) 

Preferred stock dividends and discount amortization

   2,539      (7,611)     (5,072) 

Cash dividends declared ($0.60 per share)

      (16,830)     (16,830) 

Treasury stock issued (182,507 shares)

     (11)   (3,089)    5,046    1,946  

Recognition of restricted stock compensation expense

     1,133       1,133  

Tax expense from stock-based compensation

     (66)      (66) 

Forfeitures of restricted stock (2,947 shares)

              11            (75)   (64) 

Balance at December 31, 2011

     $—   $74,285   $52,637   $421,468   $(14,108)  $(43,756)  $490,526  
(1)

The preferred stock issued to the U.S. Treasury in the amount of $108,676 is presented net of a discount of $4,012.

(in thousands, except share
and per share data)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Balance at December 31, 2011$74,285
$52,637
$421,468
$(14,108)$(43,756)$490,526
Net income for 2012

34,200


34,200
Other comprehensive income (loss), net of tax




526

526
Cash dividends declared ($0.60 per share)

(17,357)

(17,357)
Common stock issued in acquisition (1,483,327 shares)3,708
23,902



27,610
Treasury stock issued (117,633 shares, net)

(2,272)
3,270
998
Recognition of restricted stock compensation expense
949



949
Tax expense from stock-based compensation
(30)


(30)
Balance at December 31, 2012$77,993
$77,458
$436,039
$(13,582)$(40,486)$537,422
Net income for 2013

50,539


50,539
Other comprehensive income (loss), net of tax


888

888
Cash dividends declared ($0.61 per share)

(18,137)

(18,137)
Treasury stock issued (5,516 shares, net)

(283)
195
(88)
Recognition of restricted stock compensation expense
586



586
Tax benefit from stock-based compensation
96



96
Balance at December 31, 2013$77,993
$78,140
$468,158
$(12,694)$(40,291)$571,306
Net income for 2014

57,910


57,910
Other comprehensive income (loss), net of tax


(1,139)
(1,139)
Cash dividends declared ($0.68 per share)

(20,203)

(20,203)
Treasury stock issued (58,672 shares, net)

(1,805)
1,642
(163)
Recognition of restricted stock compensation expense
933



933
Tax benefit from stock-based compensation
16



16
Issuance costs (271)   (271)
Balance at December 31, 2014$77,993
$78,818
$504,060
$(13,833)$(38,649)$608,389
See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS

S&T Bancorp, Inc. and Subsidiaries

Years Ended December 31  2011  2010  2009 
(in thousands)          

OPERATING ACTIVITIES

    

Net Income

  $47,264   $43,480   $7,951  

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

    

Provision for loan losses

   15,609    29,511    72,354  

Provision for unfunded loan commitments

   (1,474)   (1,555)   2,888  

Depreciation and amortization

   6,323    6,587    7,044  

Net amortization of discounts and premiums

   1,191    881    948  

Stock-based compensation expense

   960    513    321  

Security losses (gains), net

   124    (274)   5,088  

Deferred income taxes

   2,448    (4,537)   (7,465) 

Tax expense (benefit) from stock-based compensation

   66    (46)   (4) 

Mortgage loans originated for sale

   (68,261)   (121,883)   (144,852) 

Proceeds from the sale of loans

   74,780    119,617    139,556  

Gain on the sale of loans, net

   (875)   (1,809)   (510) 

Net decrease in interest receivable

   589    2,752    4,470  

Net decrease in interest payable

   (443)   (1,678)   (2,582) 

Net decrease (increase) in other assets

   4,132    (2,745)   (17,917) 

Net (decrease) increase in other liabilities

   (8,531)   20,170    (12,723) 

Net Cash Provided by Operating Activities

   73,902    88,984    54,567  

INVESTING ACTIVITIES

    

Proceeds from maturities, prepayments and calls of securities available-for-sale

   71,318    146,960    177,443  

Proceeds from sales of securities available-for-sale

   70    2,579    4,833  

Purchases of securities available-for-sale

   (135,447)   (82,890)   (86,135) 

Proceeds from the redemption of Federal Home Loan Bank stock

   4,149    1,177    —  

Net decrease in loans

   185,182    3,236    113,064  

Proceeds from the sale of loans not originated for resale

   8,595    —    —  

Purchases of premises and equipment

   (2,531)   (3,469)   (1,577) 

Proceeds from the sale of premises and equipment

   404    60    1,314  

Net Cash Provided by Investing Activities

   131,740    67,653    208,942  

FINANCING ACTIVITIES

    

Net increase in core deposits

   105,776    63,383    79,565  

Net decrease in certificates of deposit

   (87,553)   (50,536)   (3,694) 

Net increase (decrease) in short-term borrowings

   75,000    (51,300)   (257,175) 

Net decrease in securities sold under repurchase agreements and federal funds purchased

   (10,283)   (4,281)   (68,484) 

Proceeds from long-term borrowings

   4,192    9,241    —  

Repayments of long-term borrowings

   (1,682)   (65,770)   (94,437) 

Proceeds from issuance of preferred stock and common stock warrant

   —    —    108,676  

Redemption of preferred stock

   (108,676)   —    —  

Purchase of treasury shares

   (64)   —    —  

Sale of treasury shares

   1,946    3,692    1,349  

Preferred stock dividends

   (5,072)   (5,434)   (4,513) 

Cash dividends paid to common shareholders

   (16,830)   (16,683)   (25,427) 

Tax (expense) benefit from stock-based compensation

   (66)   46    4  

Net Cash Used in Financing Activities

   (43,312)   (117,642)   (264,136) 

Net increase (decrease) in cash and cash equivalents

   162,330    38,995    (627) 

Cash and cash equivalents at beginning of year

   108,196    69,201    69,828  

Cash and Cash Equivalents at End of Year

  $270,526   $108,196   $69,201  

Supplemental Disclosures

    

Interest paid

  $27,733   $36,251   $41,082  

Income taxes paid

   15,100    14,818    5,338  

Loans transferred to held for sale

   8,753    —    —  

Transfers to other real estate owned and other repossessed assets

   8,472    11,308    4,081  

 Years ended December 31,
(dollars in thousands)2014 2013 2012
OPERATING ACTIVITIES     
Net Income$57,910
 $50,539
 $34,200
Adjustments to reconcile net income to net cash provided by operating activities:     
Provision for loan losses1,715
 8,311
 22,815
Provision for unfunded loan commitments(655) (60) 1,811
Depreciation and amortization4,703
 5,333
 7,000
Net amortization of discounts and premiums3,680
 3,826
 2,280
Stock-based compensation expense975
 687
 913
Securities (gains) losses, net(41) (5) (3,016)
Net gain on sale of merchant card servicing business—
 (3,093) —
Tax (benefit) expense from stock-based compensation(16) (96) 30
Mortgage loans originated for sale(42,842) (66,695) (104,924)
Proceeds from the sale of loans42,361
 87,932
 86,886
Deferred income taxes1,536
 (2,358) 1,038
Gain on sale of fixed assets(33) —
 —
Gain on the sale of loans, net(353) (874) (1,612)
Net (increase) decrease in interest receivable(933) (130) 973
Net decrease in interest payable(127) (2,005) (1,376)
Net decrease in other assets7,628
 25,681
 18,815
Net increase (decrease) in other liabilities2,595
 (20,917) 18,057
Net Cash Provided by Operating Activities78,103
 86,076
 83,890
INVESTING ACTIVITIES     
Proceeds from maturities, prepayments and calls of securities available-for-sale57,092
 66,744
 87,604
Proceeds from sales of securities available-for-sale1,418
 94
 66,575
Purchases of securities available-for-sale(181,213) (144,752) (166,786)
Net proceeds from the redemption of Federal Home Loan Bank stock(1,506) 1,685
 5,700
Net (increase) decrease in loans(313,264) (241,172) (21,892)
Proceeds from the sale of loans not originated for resale5,408
 5,158
 3,874
Purchases of premises and equipment(5,079) (2,833) (2,179)
Proceeds from the sale of premises and equipment96
 643
 142
Net cash acquired from bank acquisitions—
 —
 18,639
Proceeds from the sale of merchant card servicing business—
 4,750
 —
Net Cash Used in Investing Activities(437,048) (309,683) (8,323)
FINANCING ACTIVITIES     
Net increase (decrease) in core deposits240,948
 (22,767) 207,653
Net (decrease) increase in certificates of deposit(4,549) 56,174
 (217,311)
Net increase (decrease) in short-term borrowings150,000
 65,000
 —
Net (decrease) increase in securities sold under repurchase agreements(3,242) (28,735) 28,442
Proceeds from long-term borrowings—
 —
 4,311
Repayments of long-term borrowings(2,367) (12,291) (15,088)
Repayment of junior subordinated debt—
 (45,000) —
Purchase of treasury shares(163) (88) (49)
Sale of treasury shares—
 —
 1,047
Issuance costs(271) —
 —
Cash dividends paid to common shareholders(20,203) (18,137) (17,357)
Tax benefit (expense) from stock-based compensation16
 96
 (30)
Net Cash Provided by (Used in) Financing Activities360,169
 (5,748) (8,382)
Net increase (decrease) in cash and cash equivalents1,224
 (229,355) 67,185
Cash and cash equivalents at beginning of year108,356
 337,711
 270,526

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 Years ended December 31,
(dollars in thousands)2014 2013 2012
Cash and Cash Equivalents at End of Year$109,580
 $108,356
 $337,711
Supplemental Disclosures     
Transfers to other real estate owned and other repossessed assets$586
 $1,238
 $1,915
Interest paid12,609
 16,568
 22,329
Income taxes paid, net of refunds18,075
 13,130
 4,063
Loans transferred to held for sale—
 5,158
 19,255
Net assets (liabilities) from acquisitions, excluding cash and cash equivalents—
 —
 (683)
See Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

S&T Bancorp, Inc. and Subsidiaries


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

S&T Bancorp, Inc., or S&T, was incorporated on March 17, 1983 under the laws of the Commonwealth of Pennsylvania as a bank holding company and has three wholly owned subsidiaries, S&T Bank, 9th Street Holdings, Inc. and STBA Capital Trust I. We own a one-half interest in Commonwealth Trust Credit Life Insurance Company, or CTCLIC.

We are presently engaged in nonbanking activities through the following sixfive entities: 9th Street Holdings, Inc.; S&T Bancholdings, Inc.; CTCLIC; S&T Insurance Group, LLC; S&T Professional Resources Group, LLC and Stewart Capital Advisors, LLC. 9th Street Holdings, Inc. and S&T Bancholdings, Inc. are investment holding companies. CTCLIC, which is a joint venture with another financial institution, acts as a reinsurer of credit life, accident and health insurance policies sold by S&T Bank and the other institution. S&T Insurance Group, LLC, through its subsidiaries, offers a variety of insurance products. S&T Professional Resources Group, LLC markets software developed by S&T Bank. Stewart Capital Advisors, LLC is a registered investment advisor that manages private investment accounts for individuals and institutions and advises the Stewart Capital Mid Cap Fund.

On September 14, 2011,March 9, 2012 we announcedcompleted the signingacquisition and conversion of a definitive merger agreement to acquire Mainline Bancorp, Inc., or Mainline, a bank holding company based in Ebensburg, Pennsylvania. Mainline had one subsidiary, Mainline National Bank, with approximately $236eight branches and $129.5 million in assets maintains eight officesloans and $206.0 million in deposits. The acquisition expanded our market share and footprint throughout Cambria and Blair counties of western Pennsylvania. The total acquisition cost of Mainline was $27.8 million.
On August 13, 2012, we completed the acquisition of Gateway Bank of Pennsylvania, a bank with $99.1 million in loans and $105.4 million in deposits, headquartered in McMurray, Pennsylvania. The total acquisition cost of Gateway Bank was $19.8 million. As of December 31, 2012, Gateway was operating as a separate wholly-owned subsidiary of S&T, with all transactions since the acquisition date consolidated in our financial statements. On February 8, 2013, Gateway Bank was merged into S&T Bank, and their two branches are now fully operational branches of S&T Bank.
On October 29, 2014, S&T and Integrity Bancshares, Inc., or Integrity, based in Camp Hill, Pennsylvania with eight branches and approximately $860 million in assets as of September 2014, entered into a definitive Agreement and Plan of Merger of Integrity with and into S&T. The transaction, valued at approximately $21$155 million, is expected to be completedclose in the first quarter of 2012 pending the approval of the shareholders of Mainline and2015, after satisfaction of other customary closing conditions.

As soon as practicable following the merger, Integrity Bank, a Pennsylvania state-chartered bank subsidiary of Integrity, will be merged with and into S&T Bank with S&T Bank continuing as the surviving bank. The bank merger is expected to close in the second quarter of 2015. However, for a period of at least three years following the merger, S&T Bank intends to operate bank branches in the markets currently served by Integrity Bank using the name "Integrity Bank - A Division of S&T Bank".

Accounting Policies

Our financial statements have been prepared in accordance with U. S. generally accepted accounting principles, or GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods then ended. Actual results could differ from those estimates. Our significant accounting policies are described below.

Principals

Principles of Consolidation

The Consolidated Financial Statements include the accounts of 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.

Reclassification

Certain amounts in prior years’ financial statements and footnotes have been reclassified to conform to the current year’s presentation. The reclassifications had no significant effect on our financial condition or results of operations.

operations or financial condition.

Business Combinations

We account for business combinations using the acquisition method of accounting. Under this method of accounting, the acquired company’s net assets are recorded at fair value at the date of acquisition, and the results of operations of the acquired company are combined with our results from that date forward. Acquisition costs are expensesexpensed when incurred. The difference between the purchase price and the fair value of the net assets acquired (including identified intangibles) is recorded as goodwill.

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Fair Value Measurements

We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale, trading assets and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans, other real estate owned, or OREO, mortgage servicing rights, or MSRs, and certain other assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which areis developed, based on market data we have obtained from independent sources. Unobservable inputs reflect our estimateestimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.

The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.

Recurring Basis

Securities Available-for-Sale

Securities available-for-sale include both debt and equity securities.

We obtain estimated 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 securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, and vast descriptive terms and conditions databases, as well as extensive quality control programs.

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Marketable equity securities that have an active, quotable market are classified inas Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2 and 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 two readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Trading assets are recorded in other assets in the Consolidated Balance Sheets.


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Derivative Financial Instruments

We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and we sellthe sale of mortgage loans in the secondary market and enter into interest rate lock commitments.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 itsour own nonperformance risk and the respective counterparty’s nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings.

Nonrecurring Basis

Loans Held for Sale

Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 2.

3.

Impaired Loans

Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. We establish a specific reserve based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate, 2) the loan’s observable market price or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate.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 Appraised values may be discounted based on our historical knowledge, changes in market conditions from the time of valuationappraisal or our knowledge of the borrower and the borrower’s business. Prior to December 31, 2011, we classified impairedImpaired loans as Level 2 assets when thecarried at fair value was based on

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

current independent appraisals received within the past 12 months. Appraisals in excess of 12 months wereare classified as Level 3. Due to the subjective nature factored into the appraisal process, including various assumptions and expectations on cash flows, we no longer believe that these appraisals meet the Level 2 reporting for fair value. At December 31, 2011, we transferred our impaired loans from Level 2 of the fair value hierarchy into Level 3. The transfer between Levels had no impact on our consolidated financial statements.

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 valuationappraisal or other information available to us. Prior to December 31, 2011, we classified OREO as Level 2and other repossessed assets when thecarried at fair value was based on current independent appraisals received within the past 12 months. Appraisals in excess of 12 months wereare classified as Level 3. As discussed above, due to the subjective nature factored into the appraisal process, including various assumptions and expectations on cash flows, we no longer believe that these appraisals meet the Level 2 reporting for fair value. At December 31, 2011, we transferred OREO from Level 2 of the fair value hierarchy into Level 3.

Mortgage Servicing Rights

The fair value of MSRs areis 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. IfMSRs are considered impaired if the carrying value of MSRs exceeds fair value, they are considered impaired. As thevalue. The valuation model includes significant unobservable inputs,inputs; therefore, MSRs are classified as Level 3 within the fair value hierarchy.

3.

Other Assets

In accordance with GAAP, we

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 downswrite-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.


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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued


Financial Instruments

In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments as defined in the guidance.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.activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilizedutilize 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.

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Cash and Cash Equivalents and Other Short-Term Assets

The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value.

Loans

The fair value of variable rate performing loans that may reprice frequently at short-term market rates is based on carrying values adjusted for credit risk. The fair value of variable rate performing loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of fixed rate performing loans is estimated using a discounted cash flow analyses, utilizinganalysis that utilizes interest rates currently being offered for similar loans with similar terms,and adjusted for credit risk. The fair value of nonperforming loans is based on their carrying values less any specific reserve. The carrying amount of accrued interest approximates fair value.

Bank Owned Life Insurance

Fair value approximates net cash surrender value.

value of bank owned life insurance, or BOLI.

Deposits

The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.

Short-Term Borrowings

The carrying amounts of securities sold under repurchase agreements federal funds purchased, and other short-term borrowings approximate their fair values.

Long-Term Borrowings

The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.

Junior Subordinated Debt Securities

The variable rate junior subordinated debt securities reprice quarterly andquarterly; therefore, the fair values are based onapproximate the carrying 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 operation.

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

operations.

Cash and Cash Equivalents

We consider cash and due from banks, interest-bearing deposits with banks and federal funds sold as cash and cash equivalents.


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Securities

We determine the appropriate classification of securities at the time of purchase. All securities, including both debt and equity securities, are classified as available-for-sale. These are securities that we intend to hold for an indefinite period of time, but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Such securities are carried at fair value with net unrealized gains and losses deemed to be temporary, reported as a component of other comprehensive income (loss), net of tax. Realized gains and losses on the sale of available-for-sale securities and other-than-temporary impairment, or OTTI, charges are recorded within noninterest income in the Consolidated Statements of Net Income. Realized gains and losses on the sale of securities are determined using the specific-identification method. Bond premiums are amortized to the call date and bond discounts are accreted to the maturity date, both on a level yield basis.

An investment security is considered impaired if its fair value is less than its cost or amortized cost basis. We perform a quarterly review of our securities to identify those that may indicate an OTTI. Our policy for OTTI within the marketable equity securities portfolio generally requires an impairment charge when the security is in a loss position for 12 consecutive months, unless facts and circumstances would suggest the need for an OTTI prior to that time. Our policy for OTTI within the debt securities portfolio is based upon a number of factors, including but not limited to, the length of time and extent to which the estimated fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the best estimate of the impairment charge representing credit losses, the likelihood of the security’s ability to recover any decline in its estimated fair value and whether management intends to sell the security or if it is more likely than not that management will be required to sell the investment security prior to the security’s recovery.

Restricted Investment in Bank Stock

We are a member of If the Federal Home Loan Bank, or FHLB, of Pittsburgh.impairment is considered other-than-temporary based on management’s review, the impairment must be separated into credit and non-credit components. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon their level and availability of borrowings and participation in other programs. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. Stock in the FHLBcredit component is non-marketable and is redeemable at the discretion of the FHLB. Both cash and stock dividends are reported as income in taxable investment securitiesrecognized in the Consolidated Statements of Income.

At December 31, 2011 and 2010, FHLB stock totaled $18.2 million and $22.4 million, respectively. This investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We reviewed and evaluated the FHLB capital stock for OTTI at December 31, 2011. We considered the suspension of dividendsNet Income and the repurchasenon-credit component is recognized in other comprehensive income (loss), net of excess capital stock by the FHLB’s Board of Directors in a letter to member banks dated December 23, 2008. We reviewed the FHLB’s Form 10-Q for the period ended September 30, 2011 filed with the SEC on November 08, 2011 to support our conclusion around OTTI of the FHLB stock. We believe our holdings in the stock are ultimately recoverable at par value as of December 31, 2011 and, therefore, determined that the FHLB stock was not OTTI. Further, we received a total of $4.1 million from the FHLB to redeem a total of 41,488 shares of capital stock in 2011.

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

applicable taxes.

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. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off against the allowance for loan loss,losses, or ALL. Subsequent declines in fair value are recognized as a charge to noninterest income. When a loan is placed in the held-for-sale category, we stop amortizing the related deferred fees and costs. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold. Gains and losses on sales of loans held for sale are included in other noninterest income in the Consolidated Statements of Net Income.

Loans

Loans are reported at the principal amount outstanding net of unearned income, unamortized premiums or discounts and deferred origination fees and costs. We defer certain nonrefundable loan origination and commitment fees. Accretion of discounts and amortization of premiums on loans are included in interest income in the Consolidated Statements of Net Income. Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of loan yield over the respective lives of the loans without consideration of anticipated prepayments. If a loan is paid off, the remaining unaccreted or unamortized net origination fees and costs are immediately recognized into income or expense.

Interest is accrued and interest income is recognized on loans as earned.

Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more.

Generally, consumer loans are charged off against the ALL upon the loan reaching 90 days past due. Commercial loans are charged off as management becomes aware of facts and circumstances that raise doubt as to the collectability of all or a portion of the principal and when we believe a confirmed loss exists.

Impaired and Other

Nonaccrual or Nonperforming Loans

We stop accruing interest on a loan (nonaccrual loan) when the borrower’s payment is 90 days past due. Loans are also placed on nonaccrual status when payment is not past due, but we have doubt about the borrower’s ability to comply with existingcontractual repayment terms. When the interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Interest income is recognized on nonaccrual loans on a cash basis if recovery of the remaining principal is reasonably assured. LoansAs a general rule, a nonaccrual loan may be restored to accrual status when its principal and interest is paid current and the bank expects repayment of the remaining contractual principal and interest, or when the loan otherwise becomes well secured and in the process of collection.

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Troubled Debt Restructurings
Troubled debt restructurings, or TDRs, are loans where we, for economic or legal reasons related to a borrower’s financial difficulty, grant a concession to the borrower that we would not otherwise grant. We strive to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed as TDRs.
We individually evaluate all substandard commercial loans that experienced a forbearance or change in terms agreement, as well as all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan to determine if they should be designated as TDRs.
All TDRs 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 whenif 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 has resumed payingeither immediately before or after the full amount of the scheduled contractual obligation for a sustained period of time, generally at least six months, and we are reasonably assured of collecting the remaining contractual principal and interest.

restructuring.

Allowance for Loan Losses

The ALL reflects our estimates of probable losses inherent in the loan portfolio at the balance sheet date. 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.

A loan is considered impaired when 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. We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. All troubled debt restructurings, or TDRs are considered to be impaired loans and will

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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 fully expected 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. Specific reserves are established based upon 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 estimated fair value of the collateral if the loan is collateral dependent. Our impairment evaluations consist primarily of the fair value of collateral method sincebecause most loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the impaired loan is less than the recorded investment in the loan balance.

The ALL for homogeneous loans is calculated using a systematic methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. The ALL model is comprised of five distinct 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. Each segment has a distinct set of risk characteristics monitored by management. We further assess and monitor risk and performance at a more disaggregated level which includes our internal risk rating system for the commercial segments and type of collateral, lien position and loan-to-value, or LTV, for the consumer segments.

Historical

We first apply historical loss calculationsrates to pools of loans with similar risk characteristics. Loss rates are performed whereby losses fromcalculated by historical charge-offs that have occurred within each pool of loans are aggregated over the respective loss emergence period. The loss emergence period is defined as the average time between the occurrence of a credit event (deterioration in the borrower’s financial condition) and the confirmation of a loss. Currently, we have estimated 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. In general, the LEP will be shorter in an economic slowdown or recession and longer during times of economic stability or growth, as customers are better able to delay loss confirmation after a potential loss event has occurred.
In conjunction with our annual review of the ALL assumptions, we have updated our study of LEPs for our commercial portfolio segments using our loan charge-off history. Our study showed that the LEP for our commercial construction portfolio has lengthened and that our current estimated LEPs for the CRE and C&I portfolio segments did not materially change.We estimate the LEP to be two3.5 years for CRE and commercial construction and 2.5 years for C&I. This is an increase from the prior LEP of 1.5 years for commercial real estate loansconstruction.We believe that the LEPs for the consumer portfolio segments have also lengthened as they are influenced by the same improvement in economic conditions that has impacted the commercial portfolio segments over the past two years. We therefore also lengthened the LEP assumption for the consumer portfolio to 2.0 years. This is an increase from prior LEPs of 1.5 years for the consumer portfolio segment.

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Another key assumption is the look-back period, or LBP, which represents the historical data period utilized to calculate loss rates. We lengthened the LBP for C&I, Commercial Construction and the consumer loan portfolio segments in order to capture relevant historical data believed to be reflective of losses inherent in the portfolios. We use a five and one yearquarter years LBP for all other loan classes. Theseour commercial portfolio segments and three and one quarter years LBP for our consumer portfolio segments.
After consideration of the historic loss calculations, are then aggregated and applied to each loan segment to determinemanagement applies additional qualitative adjustments so that the componentALL is reflective of the ALL based upon historic losses. Since theinherent losses captured in the historical loss analysis may not accurately represent the losses inherentthat exist in the loan portfolio at the balance sheet date, qualitativedate. Qualitative adjustments are thenmade based upon changes in economic conditions, loan portfolio and asset quality data and credit process changes, such as credit policies or underwriting standards. The evaluation of the various components of the ALL requires considerable judgment in order to estimate inherent loss exposures.
The changes made to the ALL assumptions were applied prospectively and did not result in a material change to loan segments to determine the total ALL. Lengthening the LEPs does increase the historical loss rates and therefore the quantitative component of the ALL. We believe this makes the quantitative component of the ALL more reflective of inherent losses that exist within the loan portfolio, which resulted in a decrease in the qualitative component of the ALL. The ALL at December 31, 2014 reflects these changes within the C&I, Commercial Construction and consumer portfolio segments.
Qualitative adjustments are aggregated into five categories, including process, economic conditions, loan portfolio, asset quality and other external factors.

Within the five aforementioned categories, the following qualitative factors are considered:

1)Changes in our lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices not considered elsewhere in estimating credit losses;
2)Changes in national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
3)Changes in the nature and volume of our loan portfolio and terms of loans;
4)Changes in the experience, ability and depth of our lending management and staff;
5)Changes in the volume and severity of past due loans, the volume of non accrualnonaccrual loans, and the volume and severity of adversely classified or graded loans;
6)Changes in the quality of our loan review system;
7)Changes in the value of the underlying collateral for collateral-dependent loans;
8)The existence and effect of any concentrations of credit and changes in the level of such concentrations; and
9)The effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our current loan portfolio.

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Our ALL Committee meets quarterly to verify the overall adequacy of the ALL. Additionally, on an annual basis, the ALL Committee meets to validate our ALL model. This validation includes reviewing the pools of loans to ensure the segmentation results in relevant homogeneous pools of loans. The ALL Committee reviews the LEP and LBP used to calculate the loss rates. Further, the ALL Committee reviews the qualitative factors to ensure that both the categories, as noted above, and the range of qualitative adjustments remain appropriate. As a result of this ongoing monitoring process, we may make changes to our ALL assumptions to be responsive to the economic environment.
Bank Owned Life Insurance
We have purchased life insurance policies on certain executive officers and employees. We receive the cash surrender value of each policy upon its termination or benefits are payable upon the death of the insured. Changes in net cash surrender value are recognized in noninterest income or expense in the Consolidated Statements of Net Income.
Premises and Equipment

Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred, while improvements that extend an asset’s useful life are capitalized and depreciated over the estimated remaining life of the asset. Depreciation expense is computed generally by the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Leasehold improvements are amortizedpurposes over the shorterestimated useful lives of the asset’sparticular assets. Management reviews long-lived assets using events and circumstances to determine if and when an asset is evaluated for recoverability.

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The estimated useful lives for the various asset categories are as follows:
1) Land and Land ImprovementsNon-depreciating assets
2)     Buildings25 years
3)     Furniture and Fixtures5 years
4)     Computer Equipment and Software5 years or term of license
5)     Other Equipment5 years
6)     Vehicles5 years
7)     Leasehold ImprovementsLesser of estimated useful life of the asset (generally 15 years unless established otherwise) or the remaining term of the lease, including renewal options in the lease that are reasonably assured of exercise
Restricted Investment in Bank Stock
Federal Home Loan Bank, or FHLB, stock is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Pittsburgh. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon on the members asset value, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. Both cash and stock dividends are reported as income in taxable investment securities in the Consolidated Statements of Net Income. FHLB stock is evaluated for OTTI on a quarterly basis.
Atlantic Community Bankers’ Bank, or ACBB, stock is carried at cost and evaluated for impairment based on the ultimate recoverability of the carrying value. We do not currently use their membership products and services. We acquired ACBB stock through various mergers of banks that were ACBB members. ACBB stock is evaluated for OTTI on a quarterly basis.
Goodwill and Other Intangible Assets
We have three reporting units: Community Banking, Insurance and Wealth Management. At December 31, 2014, we had goodwill of $175.8 million, including $171.6 million in Community Banking, representing 98 percent of total goodwill and $4.2 million in Insurance, representing two percent of total goodwill. The carrying value of goodwill is tested annually for impairment each October 1 or more frequently if it is determined that we should do so. We first assess qualitatively whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Our qualitative assessment considers such factors as macroeconomic conditions, market conditions specifically related to the banking industry, our overall financial performance and various other factors. If we determine that it is more likely than not that the fair value is less than the carrying amount, we proceed to test for impairment. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed and could result in impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied value of goodwill of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess.
We have core deposit and other intangible assets resulting from acquisitions which are subject to amortization. We determine the amount of identifiable intangible assets based upon independent core deposit and insurance contract analyses at the time of the acquisition. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

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Variable Interest Entities
Variable interest entities, or VIEs, are legal entities that generally either do not have equity investors with voting rights or that have equity investors that do not provide sufficient financial resources for the entity to support its activities. When an enterprise has both the power to direct the economic activities of the VIE and the obligation to absorb losses of the VIE or the remaining lease term,right to receive benefits of the VIE, the entity has a controlling financial interest in the VIE. A VIE often holds financial assets, including renewal periods when reasonably assured.

loans or receivables, or other property. The company with a controlling financial interest, the primary beneficiary, is required to consolidate the VIE into its consolidated balance sheets. S&T has one wholly-owned trust subsidiary, STBA Capital Trust I, or the Trust, for which it does not absorb a majority of expected losses or receive a majority of the expected residual returns. At its inception in 2008, the Trust issued floating rate trust preferred securities to the Trustee, another financial institution, and used the proceeds from the sale to invest in junior subordinated debt, which is the sole asset of the Trust. The Trust pays dividends on the trust preferred securities at the same rate as the interest we pay on our junior subordinated debt held by the Trust. Because the third-party investors are the primary beneficiaries, the Trust qualifies as a VIE. Accordingly, the Trust and its net assets are not included in our Consolidated Financial Statements. However, the junior subordinated debt issued by S&T is included in our Consolidated Balance Sheets.

Joint Ventures

We have made investments directly in Low Income Housing Tax Credit, or LIHTC, partnerships formed with third parties. As a limited partner in these operating partnerships, we receive tax credits and tax deductions for losses incurred by the underlying properties. These investments are amortized over a maximum of 10 years, which represents the period that the tax credits will be utilized. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly impact the economic performance of the partnership and have both the obligation to absorb expected losses and the right to receive benefits.

OREO and Other Repossessed Assets

OREO and other repossessed assets are included in other assets in the Consolidated Balance Sheets and are comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of a foreclosure. At the time of foreclosure, these properties are recorded at the lower of the recorded investment in the loan or fair value less cost to sell. Loan losses arising from the acquisition of such property initially are charged against the ALL. Subsequently, these assets are carried at the lower of carrying value or current fair value less cost to sell. Gains or losses realized subsequent to acquisitionupon disposition of the asset are recorded in other expenses in the Consolidated Statements of Net Income.

Goodwill and Other Intangible Assets

We have three reporting units including: Community Banking, Wealth Management and Insurance. At December 31, 2011, we had goodwill of $165.3 million, including $161.1 million in Community Banking, representing 97 percent of total goodwill and $4.2 million in Insurance, representing three percent of total goodwill. The carrying value of goodwill is tested annually for impairment each October 1 or more frequently if indicators of impairment are present. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed and could result in an impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied goodwill value of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess.

We have core deposit and other intangible assets resulting from acquisitions which are subject to amortization. We determine the amount of identifiable intangible assets based upon independent core deposit and insurance contract analyses at the time of the acquisition. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No events or changes in circumstances occurred during the years ended December 31, 2011, 2010 and 2009.

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Mortgage Servicing Rights

MSRs are recognized as separate assets when commitments to fund a loan to be sold are made. Upon commitment, the MSR is established, which represents the then current estimated fair value of future net cash flows expected to be realized for performing the servicing activities. The estimated fair value of the MSRs areis estimated 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. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the estimated fair value of MSRs, mortgage interest rates, which are used to determine prepayment rates, are held constant over the estimated life of the portfolio. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into noninterest income in the Consolidated Statements of Net Income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans.

MSRs are regularly evaluated for impairment based on the estimated fair value of those rights. The MSRs are stratified by certain risk characteristics, primarily loan term and note rate. If temporary impairment exists within a risk stratification tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the estimated fair value. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced.

MSRs are also reviewed for OTTI. OTTI exists when the recoverability of a recorded valuation allowance is determined to be remote, taking into consideration historical and projected interest rates and loan pay-off activity. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the MSR. Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the MSR and the valuation allowance, precluding subsequent recoveries.

Bank Owned Life Insurance

We have purchased life insurance policies on certain executive officers and employees. We receive the cash surrender value


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Derivative Financial Instruments

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. We utilize interest rate swaps for commercial loans. 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 a 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 yield.rate. These agreements could have floors or caps on the contracted interest rates.

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Pursuant to our agreements with various financial institutions, we may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon our current positions and related future collateral requirements relating to them, we believe any affecteffect on our cash flow or liquidity position to be immaterial.
Derivatives contain an element of credit risk, the possibility that we will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by our Asset and Liability Committee, or ALCO, and derivatives with customers may only be executed with customers within credit exposure limits approved by our Senior Loan Committee. Interest rate swaps are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Net Income.

Interest Rate Lock Commitments and Forward Sale Contracts

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

Allowance for Unfunded 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. SinceBecause many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets. The allowance for unfunded commitments is determined using a similar methodology as our ALL. The reserve is calculated by applying historical loss rates from our ALL model to the estimated future utilization of our unfunded commitments.

Treasury Stock

The repurchase of our common stock is recorded at cost. At the time of reissuance, the treasury stock account is reduced using the average cost method. Gains and losses on the reissuance of common

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stock are recorded in additional paid-in capital, to the extent additional paid-in capital from previous treasury share transactions exists. Any deficiency is charged to retained earnings.


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Revenue Recognition
We recognize revenues as they are earned based on contractual terms or as services are provided when collectability is reasonably assured. Our principal source of revenue is interest income, which is recognized on an accrual basis. Interest and dividend income, loan fees, trust fees, fees and charges on deposit accounts, insurance commissions and other ancillary income related to our deposits and lending activities are accrued as earned.
Wealth Management Fees

Assets held in a fiduciary capacity by the subsidiary bank, S&T Bank, are not our assets and are therefore not included in our Consolidated Financial Statements. Wealth management fee income is reported in the Consolidated Statements of Net Income on thean accrual basis.

Stock-Based Compensation

Stock-based compensation may include stock options and restricted stock which areis measured using the fair value method of accounting. The grant date fair value is recognized over the period during which the recipient is required to provide service in exchange for the award. Stock option expense is determined utilizing the Black-Scholes model. Restricted stock expense is determined using the grant date fair value. We estimate expected forfeitures when stock-based awards are granted and record compensation expense only for awards that are expected to vest.

Pensions

Pension

The expense for S&T Bank’s qualified and nonqualified defined benefit pension planplans is actuarially determined using the projected unit credit actuarial cost method. It requires us to make economic assumptions regarding future interest rates and asset returns as well as various demographic assumptions. We estimate the discount rate used to measure benefit obligations by applying the projected cash flow for future benefit payments to a yield curve of high-quality corporate bonds available in the marketplace and by employing a model that matches bonds to our pension cash flows. The expected return on plan assets is an estimate of the long-term rate of return on plan assets, which is determined based on the current asset mix and estimates of return by asset class. We recognize in the Consolidated Balance Sheets an asset for the plan’s overfunded status or a liability for the plan’s underfunded status. Gains or losses related to changes in benefit obligations or plan assets resulting from experience different from that assumed are recognized as other comprehensive income (loss) in the period in which they occur. To the extent that such gains or losses exceed ten percent of the greater of the projected benefit obligation or plan assets, they are recognized as a component of pension costs over the future service periods of active plan participants. The funding policy for the qualified plan is to contribute amountsan amount each year that is at least equal to the plan sufficient to meetminimum required contribution as determined under the minimum funding requirements of the Employee Retirement Income SecurityPension Protection Act of 1974, or ERISA, plus such additional amounts as may be appropriate, subject to federal income tax limitation.

2006 and Moving Ahead for Progress in the 21st Century Act, but not more than the maximum amount permissible for taxable plan sponsors. Our nonqualified plans are unfunded.

Marketing Costs

We expense all marketing-related costs, including advertising costs, as incurred.

Income Taxes

We estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business. On a quarterly basis, management assesses the reasonableness of our effective tax rate based upon our current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year.

We classify interest and penalties as an element of tax expense.

Deferred income tax assets and liabilities are determined using the asset and liability method and are reported in other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rate and laws. When deferred tax assets are recognized, they are subject to a valuation allowance based on management’s judgment as to whether realization is more likely than not.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets. We evaluate and assess the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintain tax accruals consistent with the evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance. These changes, when they occur, can affect deferred taxes and accrued taxes, as well as the current period’s income tax expense and can be significant to our operating results.

Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The

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amount recognized is the largest amount of tax benefit that


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is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Earnings Per Share

Basic earnings per share, or EPS, is calculated using the two-class method to determine income allocated to common shareholders. Unvested share-based payment awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Income allocated to common shareholders is then divided by the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the basic EPS calculation.

Diluted earnings per shareEPS is calculated under the more dilutive of either the treasury stock method or the two-class method. Under the treasury stock method, the weighted average number of common shares outstanding is increased by the potentially dilutive common shares. For the two-class method, diluted earnings per shareEPS is calculated for each class of shareholders using the weighted average number of shares attributed to each class. Potentially dilutive common shares are common stock equivalents relating to our outstanding warrants, stock options and restricted stock.

Recently Adopted Accounting Standards Updates,

A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring

or ASU

Business Combinations (Topic 805): Pushdown Accounting
In April 2011,November 2014, the Financial Accounting Standards Board or FASB,(FASB) issued accounting standards update, or ASU No. 2011-02,2014-17, Pushdown Accounting - Business Combinations (Topic 805). The ASU provides an acquired entity with an option to elect to apply pushdown accounting. The amendments of this ASU apply to the separate financial statements of an acquired entity and its subsidiaries that are a business activity upon the occurrence of an event in which amends the guidance for evaluating whether the restructuring of a receivable by a creditor is a troubled debt restructuring, or TDR. In evaluating whether a restructuring constitutes a TDR both for purposes of recording an impairment loss and for disclosure purposes, a creditor must separately conclude that bothacquirer obtains control of the following exist: (a)entity. Pushdown accounting refers to the restructuring constitutes a concession; and (b)use of the debtor is experiencingacquirer's basis in the preparation of the acquiree's separate financial difficulties.statements. The new guidance wasstandard became effective July 1, 2011, and applies retrospectively to restructurings occurringupon issuance on or after January 1, 2011. We are also required to disclose the activity based information that was previously deferred by ASU No. 2011-01.November 18, 2014. The adoption of this ASU did not have a materialhad no impact on our results of operations or financial position.

Disclosure

Presentation of Supplementary Pro Forma Information for Business Combinations

an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists

In December 2010,July 2013, the FASB issued ASU No. 2010-29, which amends2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists. The ASU requires that entities should present an unrecognized tax benefit as a reduction of the disclosure requirementsdeferred tax asset for a net operating loss, or NOL, or similar tax loss or tax credit carry forward rather than as a liability when the uncertain tax position would reduce the NOL or other carry forward under the Accounting Standards Codification, or ASC, Topic 805, Business Combinations. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.tax law. The new guidance was effective for public companies prospectively for business combinations for which the acquisition datestandard is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this ASU impacted only disclosure requirements and did not have a material impact on our results of operations or financial position.

When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts

In December 2010, the FASB issued ASU No. 2010-28, which reflects the decision reached in Emerging Issues Task Force, or EITF Issue No. 10-A. This ASU modifies Step 1 of the goodwill impairment test for

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, this ASU was effective for fiscal years, and interim periods within those years, beginning after December 15, 2010.2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this ASU did not have a materialhad no impact on our results of operations or financial position.

Disclosures about Credit Quality

Obligations Resulting from Joint and Several Liability Arrangements for Which the Allowance for Credit Losses

In July 2010, the FASB issued an ASU that significantly increases disclosures about the credit quality of financing receivables and the allowance for credit losses and requires additional information, such as aging information and credit quality indicators disaggregated by portfolio segment and class. The disaggregated information is based on how a company develops its allowance for credit losses and how it manages its credit exposure. Required disclosures asTotal Amount of the end of a reporting period are effective for periods ending on or after December 15, 2010, while required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. Required disclosures specifically related to troubled debt restructurings were deferred in an ASU issued in January 2011. The effect of this updateObligation is included inFixed at the notes to the consolidated financial statements. The adoption of this ASU did not have a material impact on S&T’s consolidated financial statements.

Fair Value Measurements

Reporting Date

In January 2010, the FASB issued an ASU requiring new disclosures on transfers into and out of Level 1 and 2 fair value measurements of the fair value hierarchy and requiring separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. It was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010. The additional Level 3 disclosures that are now required have been included in the notes to the consolidated financial statements. The adoption of this ASU did not have a material impact on S&T’s consolidated financial statements.

Recently Issued Accounting Standards Updates

Presentation of Comprehensive Income

In December 2011,February 2013, the FASB issued ASU No. 2011-12,2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The ASU requires the measurement of obligations resulting from joint and several liability arrangements for which supersedes certain pending paragraphs in ASU No. 2011-05. It effectively defers changesthe total amount of the obligation is fixed at the reporting date as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement with its co-obligors as well as any additional amount that relatethe entity expects to the presentationpay on behalf of reclassification adjustments out of accumulated other comprehensive income.its co-obligors. The amendments will be temporary to allow the FASB time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. This amendmentnew standard is effective at the same time as the amendments in ASU No. 2011-05. It should be applied retrospectively and is effective for public companies for fiscal years and interim periods within those years, beginning after December 15, 2011.2013, and early adoption is permitted. The adoption of this ASU will only impact our presentation of comprehensive income and is not expected to have anhad no impact on our results of operations or financial position.

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Disclosures about Offsetting Assets and Liabilities


Recently Issued Accounting Standards Updates not yet Adopted
Share-Based Payment Awards with Performance Targets
In December 2011,June 2014, the FASB issued ASU No. 2011-112014-12, Share-Based Payment Awards with Performance Targets. The main provisions of ASU 2014-12 require that a performance target included in conjunction witha share-based payment award that affects vesting and that could be achieved after the Internationalrequisite service period be treated as a performance condition. Therefore, under the existing stock compensation guidance in Accounting Standards Board’s, or IASB’s, issuanceCodification Topic 718, the performance target should not be reflected in estimating the grant-date fair value of amendments to Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to International Financial Reporting Standards, or IFRS 7). While the FASB and IASB retained the existing offsetting models under U.S. GAAP and IFRS, the new standards require disclosures to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS.award. The new standards arestandard is effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The adoption ofbeginning after December 15, 2015. We do not expect that this ASU is not expected towill have a material impact on our results of operations or financial position.

Testing Goodwill for Impairment



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Repurchase-To-Maturity Transactions, Repurchase Financings and New Disclosures
In September 2011,June 2014, the FASB issued ASU No. 2011-08,2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings and New Disclosures to change the accounting for repurchase-to-maturity transactions and certain linked repurchase financings. This will result in accounting for both types of arrangements as secured borrowings on the balance sheet and require new disclosures to (i) increase transparency about the types of collateral pledged in secured borrowing transactions and (ii) enable users to better understand transactions in which permits an entitythe transferor retains substantially all of the exposure to make a qualitative assessmentthe economic return on the transferred financial asset throughout the term of whether itthe transaction. The disclosure for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions accounted for as secured borrowings is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not, it need not perform the two-step impairment test. This ASU is effectiverequired to be presented for annual and interim goodwill impairment tests performed for fiscal yearsperiods beginning after December 15, 2011. Early adoption2014, and for interim periods beginning after March 15, 2015. All other accounting and disclosure amendments in the ASU are effective for the first interim or annual period beginning after December 15, 2014. Earlier application for a public business entity is permitted. The adoption ofprohibited. We do not expect that this ASU is not expected towill have a material impact on our results of operations or financial position.

Presentation of Comprehensive Income


Revenues from Contracts with Customers
In June 2011,May 2014, the FASB issued ASU No. 2011-05,2014-09, Revenues from Contracts with Customers. The core principle of the provisions of which allowguidance is that an entity should recognize revenue to depict the optiontransfer of promised goods or services to presentcustomers in an amount that reflects the totalconsideration to which the entity expects to be entitled in exchange for those goods and services. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2016 including interim periods therein. The provisions do not apply to lease contracts, insurance contracts, financial instruments and other contractual rights or obligations (e.g. receivables, debt and equity securities, liabilities, debt, derivatives transfers, and servicing, etc.), guarantees, or non-monetary exchanges between entities. We are currently evaluating the impact of comprehensive income, the componentsadoption of netthis pronouncement on our consolidated financial statements; however, we do not expect that this ASU will have a material impact on our results of operations or financial position.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance applies to all entities that dispose of components. It will significantly change current practices for assessing discontinued operations and affect an entity’s income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, anearnings per share from continuing operations. An entity is required to reclassify assets and liabilities of a discontinued operation that are classified as held for sale or disposed of in the current period for all comparative periods presented. The ASU requires that an entity present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part ofin the statement of changescash flows or disclose in stockholders’ equity. ASU 2011-05 does not change thea note either total operating and investing cash flows for discontinued operations, or depreciation, amortization, capital expenditures and significant operating and investing noncash items that must be reported in other comprehensive income orrelated to discontinued operations. Additional disclosures are required when an itementity retains significant continuing involvement with a discontinued operation after its disposal, including the amount of other comprehensive income must be reclassifiedcash flows to net income.and from a discontinued operation. The new standard applies prospectively effective for annual periods beginning on or after December 15, 2014 and interim periods therein, and early adoption is permitted. We do not expect that this ASU 2011-05 should be applied retrospectivelywill have a material impact on our results of operations or financial position.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure has occurred and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure. Interim and annual disclosure is required of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The new standard is effective for public companiesusing either the modified retrospective transition method or a prospective transition method for fiscal years and interim periods within those years, beginning after December 15, 2011. The2014, and early adoption ofis permitted. We do not expect that this ASU will only impact our presentation of comprehensive income and is not expected to have an impact on our results of operations or financial position.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS

In May 2011, the FASB issued ASU No. 2011-04, which represents the convergence of the FASB’s and the IASB’s guidance on fair value measurement. ASU 2011-04 reflects the common requirements under U.S. GAAP and IFRS for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning for the term “fair value.” The new guidance does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under U.S. GAAP or IFRS. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13 Fair Value Measurement. A public company is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted for a public company. The adoption of this ASU is not expected to have a material impact on our results of operations or financial position.

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75

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —-- continued

Reconsideration of Effective Control



Accounting for Repurchase Agreements

Investments in Qualified Affordable Housing Projects

In April 2011,January 2014, the FASB issued ASU No. 2011-03, which is intended2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The ASU permits reporting entities to improve financial reportingmake an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The proportional amortization method permits the amortization of repurchase agreements, or repos,the initial cost of the investment in proportion to the tax credits and other agreements that both entitletax benefits received, and obligate a transferor to repurchase or redeem financial assets before their maturity. When an entity enters into a typical repo arrangement, it transfers financial assets to a counterparty in exchange for cash with an agreement forrecognizes the counterparty to return the same or equivalent financial assets for a fixed pricenet investment performance in the future. Current guidance prescribes when an entity may or may not recognizeincome statement as a sale upon the transfercomponent of financial assets subject to a repo agreement. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. This ASU improves the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets and focuses the assessment on the transferor’s contractual rights. This guidanceincome tax expense (benefit). The new standard is effective retrospectively for the firstfiscal years and interim or annual periodperiods within those years, beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early2014, and early adoption is permitted. We do not permitted. The adoption ofexpect that this ASU is not expected towill have a material impact on our results of operations or financial position.


NOTE 2. EARNINGS PER SHARE

The following table reconciles the numerators and denominators of basic earnings per share with thatand diluted EPS:
 Years ended December 31,
(dollars in thousands, except share and per share data)201420132012
Numerator for Earnings per Common Share—Basic:   
Net income$57,910
$50,539
$34,200
Less: Income allocated to participating shares165
147
126
Net Income Allocated to Common Shareholders$57,745
$50,392
$34,074
Numerator for Earnings per Common Share—Diluted:   
Net income$57,910
$50,539
$34,200
Denominators:   
Weighted Average Common Shares Outstanding—Basic29,683,103
29,647,231
28,976,619
Add: Dilutive potential common shares25,621
35,322
32,261
Denominator for Treasury Stock Method—Diluted29,708,724
29,682,553
29,008,880
Weighted Average Common Shares Outstanding—Basic29,683,103
29,647,231
28,976,619
Add: Average participating shares outstanding84,918
86,490
107,274
Denominator for Two-Class Method—Diluted29,768,021
29,733,721
29,083,893
Earnings per common share—basic$1.95
$1.70
$1.18
Earnings per common share—diluted$1.95
$1.70
$1.18
Warrants considered anti-dilutive excluded from dilutive potential common shares - exercise price $31.53 per share, expires January 2019517,012
517,012
517,012
Stock options considered anti-dilutive excluded from dilutive potential common shares419,538
619,418
747,443
Restricted stock considered anti-dilutive excluded from dilutive potential common shares59,297
51,169
75,012


76
Table of diluted earnings per share:

   2011  2010  2009 
(in thousands, except share and per share data)         

Numerator for Earnings per Common Share—Basic:

   

Net income

 $47,264   $43,480   $7,951  

Less: Preferred stock dividends and discount amortization

  7,611    6,201    5,913  

Less: Income allocated to participating shares

  130    42    3  

Net Income Allocated to Common Shareholders

 $39,523   $37,237   $2,035  

Numerator for Earnings per Common Share—Diluted:

   

Net income

 $47,264   $43,480   $7,951  

Less: Preferred stock dividends and discount amortization

  7,611    6,201    5,913  

Net Income Available to Common Shareholders

 $39,653   $37,279   $2,038  

Denominators:

   

Weighted Average Common Shares Outstanding—Basic

  27,966,981    27,791,145    27,626,223  

Add: Potentially dilutive common shares

  23,169    22,261    32,638  

Denominator for Treasury Stock Method—Diluted

  27,990,150    27,813,406    27,658,861  

Weighted Average Common Shares Outstanding—Basic

  27,966,981    27,791,145    27,626,223  

Add: Average participating shares outstanding

  92,212    33,899    55,484  

Denominator for Two-Class Method—Diluted

  28,059,193    27,825,044    27,681,707  

Earnings per common share—basic

 $1.41   $1.34   $0.07  

Earnings per common share—diluted

 $1.41   $1.34   $0.07  

Warrants considered anti-dilutive excluded from potentially dilutive common shares

  517,012    517,012    517,012  

Stock options considered anti-dilutive excluded from potentially dilutive common shares

  757,580    930,969    1,173,660  

Restricted stock considered anti-dilutive excluded from potentially dilutive common shares

  69,043    11,638    22,246  

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Contents



NOTE 3. FAIR VALUE MEASUREMENTS

Refer to Note 1 Summary of Significant Accounting Policies under Fair Value Measurements for our accounting policy including details of the valuation methods used to determine the fair values of our assets and liabilities.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at December 31, 20112014 and 2010.2013. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.

December 31, 2011  Level 1   Level 2   Level 3   Total 
(in thousands)                

ASSETS

        

Securities available-for-sale:

        

Obligations of U.S. government corporations and agencies

  $—    $142,786    $—    $142,786  

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

   —     65,395     —     65,395  

Mortgage-backed securities of U.S. government corporations and agencies

   —     48,752     —     48,752  

Obligations of states and political subdivisions

   —     88,805     —     88,805  

Marketable equity securities

   2,855     7,316     1,687     11,858  

Total securities available-for-sale

   2,855     353,054     1,687     357,596  

Trading securities held in a Rabbi Trust

   1,949     —     —     1,949  

Total securities

   4,804     353,054     1,687     359,545  

Derivative financial assets:

        

Interest rate swaps

   —     23,764     —     23,764  

Interest rate lock commitments

   —     244     —     244  

Total Assets

  $4,804    $377,062    $1,687    $383,553  

LIABILITIES

        

Derivative financial liabilities:

        

Interest rate swaps

  $—    $23,639    $—    $23,639  

Forward sale contracts

   —     95     —     95  

Total Liabilities

  $—    $23,734    $—    $23,734  

PAGE 85

 December 31, 2014
(dollars in thousands)Level 1Level 2Level 3Total
ASSETS    
Securities available-for-sale:    
U.S. Treasury securities$—
$14,880
$—
$14,880
Obligations of U.S. government corporations and agencies—
269,285
—
269,285
Collateralized mortgage obligations of U.S. government corporations and agencies—
118,006
—
118,006
Residential mortgage-backed securities of U.S. government corporations and agencies—
46,668
—
46,668
Commercial mortgage-backed securities of U.S. government corporations and agencies—
39,673
—
39,673
Obligations of states and political subdivisions—
142,702
—
142,702
Marketable equity securities178
8,881
—
9,059
Total securities available-for-sale178
640,095
—
640,273
Trading securities held in a Rabbi Trust3,456
—
—
3,456
Total securities3,634
640,095
—
643,729
Derivative financial assets:    
Interest rate swaps—
12,981
—
12,981
Interest rate lock commitments—
235
—
235
Total Assets$3,634
$653,311
$—
$656,945
LIABILITIES    
Derivative financial liabilities:    
Interest rate swaps$—
$12,953
$—
$12,953
Forward sale contracts—
57
—
57
Total Liabilities$—
$13,010
$—
$13,010

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NOTE 3. FAIR VALUE MEASUREMENTS —-- continued

December 31, 2010  Level 1   Level 2   Level 3   Total 
(in thousands)                

ASSETS

        

Securities available-for-sale:

        

Obligations of U.S. government corporations and agencies

  $—    $125,675    $—    $125,675  

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

   —     41,491     —     41,491  

Mortgage-backed securities of U.S. government corporations and agencies

   —     43,991     —     43,991  

Obligations of states and political subdivisions

   —     65,772     —     65,772  

Marketable equity securities

   1,528     7,980     1,588     11,096  

Total securities available-for-sale

   1,528     284,909     1,588     288,025  

Trading securities held in a Rabbi Trust

   2,089     —     —     2,089  

Total securities

   3,617     284,909     1,588     290,114  

Derivative financial assets:

        

Interest rate swaps

   —     17,518     —     17,518  

Interest rate lock commitments

   —     217     —     217  

Forward sale contracts

   —     412     —     412  

Total Assets

  $3,617    $303,056    $1,588    $308,261  

LIABILITIES

        

Derivative financial liabilities:

        

Interest rate swaps

  $—    $17,355    $—    $17,355  

Total Liabilities

  $—    $17,355    $—    $17,355  




 December 31, 2013
(dollars in thousands)Level 1Level 2Level 3Total
ASSETS    
Securities available-for-sale:    
Obligations of U.S. government corporations and agencies$—
$234,751
$—
$234,751
Collateralized mortgage obligations of U.S. government corporations and agencies—
63,774
—
63,774
Residential mortgage-backed securities of U.S. government corporations and agencies—
48,669
—
48,669
Commercial mortgage-backed securities of U.S. government corporations and agencies—
39,052
—
39,052
Obligations of states and political subdivisions—
114,264
—
114,264
Marketable equity securities202
8,713
—
8,915
Total securities available-for-sale202
509,223
—
509,425
Trading securities held in a Rabbi Trust2,864
—
—
2,864
Total securities3,066
509,223
—
512,289
Derivative financial assets:    
Interest rate swaps—
13,698
—
13,698
Interest rate lock commitments—
85
—
85
Forward sales contracts—
34
—
34
Total Assets$3,066
$523,040
$—
$526,106
LIABILITIES    
Derivative financial liabilities:    
Interest rate swaps—
13,647
—
13,647
Total Liabilities$—
$13,647
$—
$13,647
We classify financial instruments inas Level 3 when valuation models are used because significant inputs are not observable in the market. The following tables presenttable presents the changes in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine the fair value:

    Marketable  Equity
Securities(1)		 
(in thousands)    

Balance at beginning of year

  $1,588  

Total gains (losses) included in other comprehensive income/loss

   99  

Ending Balance at December 31, 2011

  $1,687  
 Years ended December 31,
(dollars in thousands)20142013
Balance at beginning of year$—
$300
Total gains included in other comprehensive income (loss)(1)
—
44
Net purchases, sales, issuances and settlements—
—
Transfers out of Level 3—
(344)
Balance at End of Year$—
$—
(1)

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

    Marketable Equity
Securities(1)		 
(in thousands)    

Balance at beginning of year

  $1,138  

Total gains (losses) included in other comprehensive income/loss

   (40) 

Transfers into Level 3

   490  

Ending Balance at December 31, 2010

  $1,588  
(1)

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

PAGE 86

NOTE 3. FAIR VALUE MEASUREMENTS — continued

In the second quarter of 2013, $0.3 million was transferred out of Level 3 into Level 2 as a result of a security becoming listed on a national securities exchange. There were no Level 3 liabilities measured at fair value on a recurring basis for any of the periods presented.
We may be required to measure certain assets and liabilities 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 December 31, 2014 and 2013. The following tables presenttable presents our assets that are measured at estimated fair value on a nonrecurring basis by the fair value hierarchy level at December 31, 2011 and 2010. There were no liabilities measured at estimated fair value on a nonrecurring basis during these periods. Loans held for sale are recorded at the lower of cost or fair value. At December 31, 2011, we had no loans held for sale that were recorded at fair value. Prior to December 31, 2011, we classified impaired loans and OREO as Level 2 assets when their fair value was based on current independent appraisal received within the past 12 months. Appraisals in excess of 12 months were classified as Level 3. Due to the subjective nature factored into the appraisal process, including various assumptions and expectations on cash flows, we no longer believe that these appraisals meet the Level 2 reporting for fair value. At December 31, 2011, we transferred our impaired loans and OREO from Level 2 of the fair value hierarchy into Level 3.

December 31, 2011  Level 1   Level 2   Level 3   Total 
(in thousands)        

ASSETS

        

Impaired Loans

  $—    $—    $36,500    $36,500  

Other real estate owned

   —     —     3,739     3,739  

Mortgage servicing rights

   —     —     2,153     2,153  

Total Assets

  $—    $—    $42,392    $42,392  
December 31, 2010  Level 1   Level 2   Level 3   Total 
(in thousands)        

ASSETS

        

Loans held for sale

  $—    $3,185    $—    $3,185  

Impaired loans

   —     10,968     1,478     12,446  

Other real estate owned

   —     5,820     —     5,820  

Mortgage servicing rights

   —     —     2,510     2,510  

Total Assets

  $—    $19,973    $3,988    $23,961  

PAGE 87

dates presented:


78

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NOTE 3. FAIR VALUE MEASUREMENTS —-- continued




 December 31, 2014 December 31, 2013
(dollars in thousands)Level 1Level 2Level 3Total Level 1Level 2Level 3Total
ASSETS(1)
         
Loans held for sale$—
$—
$—
$—
 $—
$—
$1,516
$1,516
Impaired loans—
—
12,916
12,916
 —
—
19,197
19,197
Other real estate owned—
—
117
117
 —
—
317
317
Mortgage servicing rights—
—
2,934
2,934
 —
—
1,025
1,025
Total Assets$—
$—
$15,967
$15,967
 $—
$—
$22,055
$22,055
(1)This table presents only the nonrecurring items that are recorded at fair value in our financial statements.
The carrying amountvalues and fair valuevalues of our financial instruments at December 31, 20112014 and 20102013 are shownpresented in the following table:

   2011   2010 
December 31  Fair Value   Carrying
Value(1)		   Fair Value   Carrying
Value(1)		 
(in thousands)                

ASSETS

        

Cash and due from banks, including interest-bearing deposits

  $270,526    $270,526    $108,196    $108,196  

Securities available-for-sale

   357,596     357,596     288,025     288,025  

Loans held for sale

   2,850     2,850     8,337     8,337  

Portfolio loans

   3,120,352     3,129,759     3,328,084     3,355,590  

Bank owned life insurance

   56,755     56,755     54,924     54,924  

Federal Home Loan Bank stock, at cost

   18,216     18,216     22,365     22,365  

Trading securities held in a Rabbi Trust

   1,949     1,949     2,089     2,089  

Mortgage servicing rights

   2,153     2,153     2,510     2,467  

Interest rate swaps

   23,764     23,764     17,518     17,518  

Interest rate lock commitments

   244     244     217     217  

Forward sale contracts

   —     —     412     412  

LIABILITIES

        

Deposits

  $3,343,889    $3,335,859    $3,328,864    $3,317,524  

Securities sold under repurchase agreements

   30,370     30,370     40,653     40,653  

Short-term borrowings

   75,000     75,000     —     —  

Long-term borrowings

   34,171     31,874     31,345     29,365  

Junior subordinated debt securities

   90,619     90,619     91,460     90,619  

Interest rate swaps

   23,639     23,639     17,355     17,355  

Forward sale contracts

   95     95     —     —  
tables:
  Fair Value Measurements at December 31, 2014
(dollars in thousands)
Carrying
Value(1)
TotalLevel 1Level 2Level 3
ASSETS     
Cash and due from banks, including interest-bearing deposits$109,580
$109,580
$109,580
$—
$—
Securities available-for-sale640,273
640,273
178
640,095
—
Loans held for sale2,970
2,991
—
—
2,991
Portfolio loans, net of unearned income3,868,746
3,827,634
—
—
3,827,634
Bank owned life insurance62,252
62,252
—
62,252
—
FHLB and other restricted stock15,135
15,135
—
—
15,135
Trading securities held in a Rabbi Trust3,456
3,456
3,456
—
—
Mortgage servicing rights2,817
2,934
—
—
2,934
Interest rate swaps12,981
12,981
—
12,981
—
Interest rate lock commitments235
235
—
235
—
LIABILITIES     
Deposits$3,908,842
$3,910,342
$—
$—
$3,910,342
Securities sold under repurchase agreements30,605
30,605
—
—
30,605
Short-term borrowings290,000
290,000
—
—
290,000
Long-term borrowings19,442
20,462
—
—
20,462
Junior subordinated debt securities45,619
45,619
—
—
45,619
Interest rate swaps12,953
12,953
—
12,953
—
Forward sale contracts57
57
 57
 
(1)

(1)As reported in the Consolidated Balance Sheets


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NOTE 3. FAIR VALUE MEASUREMENTS -- continued



  Fair Value Measurements at December 31, 2013
(dollars in thousands)
Carrying
Value(1)
TotalLevel 1Level 2Level 3
ASSETS     
Cash and due from banks, including interest-bearing deposits$108,356
$108,356
$108,356
$—
$—
Securities available-for-sale509,425
509,425
202
509,223
—
Loans held for sale2,136
2,139
—
—
2,139
Portfolio loans, net of unearned income3,566,199
3,538,072
—
—
3,538,072
Bank owned life insurance60,480
60,480
—
60,480
—
FHLB and other restricted stock13,629
13,629
—
—
13,629
Trading securities held in a Rabbi Trust2,864
2,864
2,864
—
—
Mortgage servicing rights2,919
3,143
—
—
3,143
Interest rate swaps13,698
13,698
—
13,698
—
Interest rate lock commitments85
85
—
85
—
Forward sale contracts34
34
—
34
—
LIABILITIES     
Deposits$3,672,308
$3,673,624
$—
$—
$3,673,624
Securities sold under repurchase agreements33,847
33,847
—
—
33,847
Short-term borrowings140,000
140,000
—
—
140,000
Long-term borrowings21,810
22,924
—
—
22,924
Junior subordinated debt securities45,619
45,619
—
—
45,619
Interest rate swaps13,647
13,647
—
13,647
—
(1)As reported in the Consolidated Balance Sheets

NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Board of Governors of the Federal Reserve System, or the Federal Reserve, imposes certain reserve requirements on all depository institutions. These reserves are maintained in the form of vault cash or as an interest-bearing balance with the Federal Reserve. During the years ended 2011, 2010 and 2009 theThe required reserves averaged $41.8 million for the year ended 2014, $39.7 million for the year ended 2013 and $36.6 million $32.5 million and $27.2 million, respectively.

for the year ended 2012.

NOTE 5. DIVIDEND AND LOAN RESTRICTIONS

S&T is a legal entity separate and distinct from its banking and other subsidiaries. A substantial portion of S&T’sour revenues consist of dividend payments it receiveswe receive from S&T Bank. S&T Bank, in turn, is subject to state laws and regulations that limit the amount of dividends it can pay to S&T.us. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. Thus, under certain circumstances based upon S&T’sour financial condition, our ability to declare and pay quarterly dividends may require consultation with the Federal Reserve and may be prohibited by

PAGE 88

NOTE 5. DIVIDEND AND LOAN RESTRICTIONS — continued

applicable Federal Reserve regulations. If we were to pay a dividend in contravention of Federal Reserve regulations, the Federal Reserve could raise supervisory concerns. We redeemed our Series A Preferred Stock on December 7, 2011, and therefore we are no longer subject to the dividend restriction imposed by participation in the Capital Purchase Program, or CPP.

guidelines.

Federal law prohibits S&Tus from borrowing from S&T Bank unless such loans are collateralized by specific obligations. Further, such loans are limited to 10 percent of S&T Bank’s capital stock and additional paid-in capital, as defined. S&T currently hassurplus. In April 2012, we closed a $5.0 million line of credit with S&T Bank that had been secured by investments of another subsidiary of S&T.



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NOTE 6. SECURITIES AVAILABLE-FOR-SALE

The following tables indicatepresent the amortized cost and fair value of available-for-sale securities as of the dates presented:
 December 31, 2014 December 31, 2013
(dollars in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value
 
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value
U.S. Treasury securities$14,873
$7
$—
$14,880
 $—
$—
$—
$—
Obligations of U.S. government corporations and agencies268,029
2,334
(1,078)269,285
 235,181
2,151
(2,581)234,751
Collateralized mortgage obligations of U.S. government corporations and agencies116,897
1,257
(148)118,006
 63,776
601
(603)63,774
Residential mortgage-backed securities of U.S. government corporations and agencies45,274
1,548
(154)46,668
 47,934
1,420
(685)48,669
Commercial mortgage-backed securities of U.S. government corporations and agencies39,834
232
(393)39,673
 40,357
—
(1,305)39,052
Obligations of states and political subdivisions136,977
5,789
(64)142,702
 115,572
1,294
(2,602)114,264
Debt Securities621,884
11,167
(1,837)631,214
 502,820
5,466
(7,776)500,510
Marketable equity securities7,579
1,480
—
9,059
 7,579
1,336
—
8,915
Total$629,463
$12,647
$(1,837)$640,273
 $510,399
$6,802
$(7,776)$509,425
The following table shows the composition of gross and net realized gains and losses for the securities portfolio at December 31:

    Available-for-Sale 
2011  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		  Fair Value 
(in thousands)               

Obligations of U.S. government corporations and agencies

  $138,386    $4,400    $—   $142,786  

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

   63,202     2,193     —    65,395  

Mortgage-backed securities of U.S. government corporations and agencies

   45,289     3,463     —    48,752  

Obligations of states and political subdivisions

   85,689     3,128     (12)   88,805  

Debt Securities

   332,566     13,184     (12)   345,738  

Marketable equity securities

   10,152     2,179     (473)   11,858  

Total

  $342,718    $15,363    $(485)  $357,596  

    Available-for-Sale 
2010  Amortized
Cost		   Gross
Unrealized
Gains		   Gross
Unrealized
Losses		  Fair Value 
(in thousands)               

Obligations of U.S. government corporations and agencies

  $123,812    $2,078    $(215)  $125,675  

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

   39,790     1,701     —    41,491  

Mortgage-backed securities of U.S. government corporations and agencies

   41,373     2,618     —    43,991  

Obligations of states and political subdivisions

   64,651     1,357     (236)   65,772  

Debt Securities

   269,626     7,754     (451)   276,929  

Marketable equity securities

   10,347     1,010     (261)   11,096  

Total

  $279,973    $8,764    $(712)  $288,025  

PAGE 89

periods presented:

 Years ended December 31,
(dollars in thousands)2014
2013
2012
Gross realized gains$41
$5
$3,027
Gross realized losses—
—
(11)
Net Realized Gains$41
$5
$3,016

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NOTE 6. SECURITIES AVAILABLE-FOR-SALE —-- continued

During 2011, there were minimal gross realized gains. During 2010 and 2009, there were $0.4 million and $0.2 million in gross realized gains, respectively. There were $0.1 million in gross realized losses in 2011 and 2010 and $5.3 million in 2009, relating to securities available-for-sale.



The following tables present the fair value and the age of gross unrealized losses by investment category:

    Less Than 12 Months  12 Months or More  Total 
2011  Fair Value   Unrealized
Losses		  Fair Value   Unrealized
Losses		  Fair Value   Unrealized
Losses		 
(in thousands)                      

Obligations of U.S. government corporations and agencies

  $—    $—   $—    $—   $—    $—  

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

   —     —    —     —    —     —  

Mortgage-backed securities of U.S. government corporations and agencies

   —     —    —     —    —     —  

Obligations of states and political subdivisions

   502     (8)   414     (4)   916     (12) 

Debt Securities

   502     (8)   414     (4)   916     (12) 

Marketable equity securities

   5,143     (473)   —     —    5,143     (473) 

Total Temporarily Impaired Securities

  $5,645    $(481)  $414    $(4)  $6,059    $(485) 

    Less Than 12 Months  12 Months or More  Total 
2010  Fair Value   Unrealized
Losses		  Fair Value   Unrealized
Losses		  Fair Value   Unrealized
Losses		 
(in thousands)                      

Obligations of U.S. government corporations and agencies

  $20,558    $(215)  $—    $—   $20,558    $(215) 

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

   —     —    —     —    —     —  

Mortgage-backed securities of U.S. government corporations and agencies

   —     —    —     —    —     —  

Obligations of states and political subdivisions

   13,167     (194)   917     (42)   14,084     (236) 

Debt Securities

   33,725     (409)   917     (42)   34,642     (451) 

Marketable equity securities

   2,068     (261)   —     —    2,068     (261) 

Total Temporarily Impaired Securities

  $35,793    $(670)  $917    $(42)  $36,710    $(712) 

PAGE 90

category as of the dates presented:

 December 31, 2014
 Less Than 12 Months 12 Months or More  Total
(dollars in thousands)
Number
of
Securities

Fair
Value

Unrealized
Losses

 
Number
of
Securities

Fair
Value
Unrealized
Losses

 
Number
of
Securities

Fair
Value
Unrealized
Losses

Obligations of U.S. government corporations and agencies4
$39,745
$(207) 8
$63,149
$(871) 12
$102,894
$(1,078)
Collateralized mortgage obligations of U.S. government corporations and agencies1
9,323
(148) —
—
—
 1
9,323
(148)
Residential mortgage-backed securities of U.S. government corporations and agencies—
—
—
 1
8,982
(154) 1
8,982
(154)
Commercial mortgage-backed securities of U.S. government corporations and agencies1
9,998
(25) 2
20,640
(368) 3
30,638
(393)
Obligations of states and political subdivisions1
263
(1) 2
10,756
(63) 3
11,019
(64)
Total Temporarily Impaired Securities7
$59,329
$(381) 13
$103,527
$(1,456) 20
$162,856
$(1,837)

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NOTE 6. SECURITIES AVAILABLE-FOR-SALE —-- continued



 December 31, 2013
 Less Than 12 Months 12 Months or More  Total
(dollars in thousands)
Number
of
Securities

Fair 
Value

Unrealized
Losses

 
Number
of
Securities

Fair
Value

Unrealized
Losses

 
Number
of
Securities

Fair
Value

Unrealized
Losses

Obligations of U.S. government corporations and agencies16
$126,017
$(2,581) —
$—
$—
 16
$126,017
$(2,581)
Collateralized mortgage obligations of U.S. government corporations and agencies3
39,522
(603) —
—
—
 3
39,522
(603)
Residential mortgage-backed securities of U.S. government corporations and agencies2
22,822
(685) —
—
—
 2
22,822
(685)
Commercial mortgage-backed securities of U.S. government corporations and agencies4
39,052
(1,305) —
—
—
 4
39,052
(1,305)
Obligations of states and political subdivisions16
47,529
(1,739) 2
10,088
(863) 18
57,617
(2,602)
Total Temporarily Impaired Securities41
$274,942
$(6,913) 2
$10,088
$(863) 43
$285,030
$(7,776)

We do not believe any individual unrealized loss as of December 31, 20112014 represents an OTTI. Refer to Note 1 Summary of Significant Accounting Policies for our accounting policy surrounding securities and OTTI.

As of December 31, 2011,2014, the unrealized losses on two20 debt securities were primarily attributable to changes in interest rates. Therates and not related to the credit quality of these securities. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security. There were no unrealized losses on four marketable equity securities as of December 31, 2011 were attributable to temporary declines in the market value of these stocks.securities. We do not intend to sell and it is more likely than not likely that we will not be required to sell any of the securities referenced in the table above, in an unrealized loss position before recovery of their amortized cost.

Net


The following table displays net unrealized gains and losses, net of $9.7 million and $5.2 million weretax on securities available for sale included in accumulated other comprehensive loss, net of tax, at December 31, 2011 and 2010, respectively. Gross unrealized gains of $10.0 million and $5.7 million were netted against gross unrealized losses of $0.3 million and $0.5 million, respectively,income/(loss) for these same periods. During 2011 unrealized gains reclassified out of accumulated other comprehensive loss into earnings were minimal, while $0.1 million of unrealized losses were reclassified into earnings to record OTTI. During 2010, approximately $0.4 million of unrealized gains were reclassified out of accumulated other comprehensive loss into earnings, while $0.1 million of unrealized losses were reclassified into earnings to record OTTI.

the periods presented:

 December 31, 2014 December 31, 2013
(dollars in thousands)Gross Unrealized Gains
Gross Unrealized Losses
Net Unrealized Gains/(Losses)
 Gross Unrealized Gains
Gross Unrealized Losses
Net Unrealized Gains/(Losses)
Total unrealized gains/(losses) on securities available for sale$12,647
$(1,837)$10,810
 $6,802
$(7,776)$(974)
Income tax expense/(benefit)4,426
(643)3,783
 2,381
(2,722)(341)
Net unrealized gains/(losses), net of tax included in accumulated other comprehensive income/(loss)$8,221
$(1,194)$7,027
 $4,421
$(5,054)$(633)
The amortized cost and fair value of securities available-for-sale at December 31, 2011,2014 by contractual maturity are included in the table below. Actual maturities may differ from contractual maturities because borrowersissuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Available-for-Sale  Amortized
Cost		   Fair Value 
(in thousands)        

Due in one year or less

  $8,616    $8,722  

Due after one year through five years

   143,558     147,565  

Due after five years through ten years

   18,051     19,481  

Due after ten years

   53,850     55,823  
   224,075     231,591  

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

   63,202     65,395  

Mortgage-backed securities of U.S. government corporations and agencies

   45,289     48,752  

Debt Securities

   332,566     345,738  

Marketable equity securities

   10,152     11,858  

Total

  $342,718    $357,596  


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NOTE 6. SECURITIES AVAILABLE-FOR-SALE -- continued


 December 31, 2014
(dollars in thousands)
Amortized
Cost

 Fair Value
Due in one year or less$21,137
 $21,339
Due after one year through five years196,589
 197,183
Due after five years through ten years101,013
 102,788
Due after ten years101,140
 105,557
 419,879
 426,867
Collateralized mortgage obligations of U.S. government corporations and agencies116,897
 118,006
Residential mortgage-backed securities of U.S. government corporations and agencies45,274
 46,668
Commercial mortgage-backed securities of U.S. government corporations and agencies39,834
 39,673
Debt Securities621,884
 631,214
Marketable equity securities7,579
 9,059
Total$629,463
 $640,273
At December 31, 20112014 and 2010,2013, securities with carrying values of $233.9$289.1 million and $209.3$243.2 million respectively, were pledged to secure repurchase agreements, public funds, trust fund depositsfor various regulatory and as collateral for our interest rate swaps.

PAGE 91

legal requirements.

NOTE 7. LOANS AND LOANS HELD FOR SALE

Loans are presented net of unearned income of $2.1 million and $1.3 million at December 31, 2014 and 2013. The following table presentsindicates the composition of the loans at December 31:

    2011  2010 
(in thousands)       

Consumer

   

Home equity

  $411,404   $441,096  

Residential mortgage

   358,846    359,536  

Installment and other consumer

   67,131    74,780  

Consumer construction

   2,440    4,019  

Total Consumer Loans

   839,821    879,431  

Commercial

   

Commercial real estate

   1,415,333    1,494,202  

Commercial and industrial

   685,753    722,359  

Commercial construction

   188,852    259,598  

Total Commercial Loans

   2,289,938    2,476,159  

Total Portfolio Loans

   3,129,759    3,355,590  

Allowance for loan losses

   (48,841)   (51,387) 

Total Portfolio Loans, net

   3,080,918    3,304,203  

Loans held for sale

   2,850    8,337  

Total Loans, Net

  $3,083,768   $3,312,540  

as of the dates presented:

 December 31,
(dollars in thousands)20142013
Commercial  
Commercial real estate$1,682,236
$1,607,756
Commercial and industrial994,138
842,449
Commercial construction216,148
143,675
Total Commercial Loans2,892,522
2,593,880
Consumer  
Residential mortgage489,586
487,092
Home equity418,563
414,195
Installment and other consumer65,567
67,883
Consumer construction2,508
3,149
Total Consumer Loans976,224
972,319
Total Portfolio Loans3,868,746
3,566,199
Loans held for sale2,970
2,136
Total Loans$3,871,716
$3,568,335
We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by monitoring the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these classes. Commercialsegments. Total commercial loans represent 73 percent and 74represented 75 percent of total portfolio loans at December 31, 20112014 and 2010, respectively. Within the commercial portfolio, the CRE and commercial construction portfolios combined comprise 7073 percent of commercial loans and 51 percent of total portfolio loans at December 31, 20112013. Within our commercial portfolio, CRE and 71Commercial Construction portfolios combined comprise 66 percent of total commercial loans and 5249 percent of total portfolio loans at December 31, 2010.2014 and 68 percent of total commercial loans and 49 percent of total portfolio loans at December 31, 2013. Further segmentation of the CRE and commercial constructionCommercial Construction portfolios by industry and collateral type reveal no concentration in excess of nine percent of total loans.

loans at either December 31, 2014 or December 31, 2013.

Our market area includes Pennsylvania and the contiguous states of Ohio, West Virginia, New York and Maryland. The vast majority of bothour commercial and consumer loans are made to businesses and individuals in our western Pennsylvaniathis market area resulting in a

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NOTE 7. LOANS AND LOANS HELD FOR SALE -- continued


geographic concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data as well as information supplied by our customers. Only the CRE and commercial construction portfolios combined have any significant out-of-state exposure, with 19 percent of the combined portfolio and 10 percent of total loans being out-of-state loans at December 31, 2011 and 21 percent of the combined portfolio and 11 percent of total loans being out-of-state loans at December 31, 2010. Management believes underwriting guidelines, active monitoring of economic conditions and ongoing review by credit administration mitigates the concentration risk present in the loan portfolio.

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NOTE 7. LOANS AND LOANS HELD FOR SALE — continued

The following table presents a summary Our CRE and Commercial Construction portfolios have out of nonperforming assets for the periods stated:

    2011   2010 
(in thousands)        

Nonperforming Assets

    

Nonaccrual loans

  $37,931    $31,104  

Nonaccrual TDRs

   18,184     32,779  

Total nonperforming loans

  $56,115    $63,883  

OREO

   3,967     5,820  

Total Nonperforming Assets

  $60,082    $69,703  

OREO which is included in other assets in the Consolidated Balance Sheets consistsmarket exposure of 18 properties with one property comprising $1.5 million or 378 percent of the balance. It is our policy to obtain OREO appraisals on an annual basis. All OREO propertiescombined portfolio and 3.9 percent of total loans at December 31, 2011 had current appraisals.

In situations2014 and 7.9 percent of the combined portfolio and 3.9 percent of total loans at December 31, 2013.

TDRs are loans where we, for economic or legal reasons related to a borrower’sborrower's financial difficulties, we may grant a concession for other than an insignificant period of time to the borrower that we would not otherwise be considered, the related loan is classified as a TDR.grant. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordablethe terms before their loan reaches nonaccrual status. These modified terms generally include reductions in contractual interest rates, principal deferment and extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics.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. While unusual, there may be instances of loan principal forgiveness. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed as TDRs.
We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, as well as all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan.

loan to determine if they should be designated as TDRs. All TDRs are considered to be impaired loans and will be reported as impaired loans for the remaining life of the loan, unless the restructuring agreement specifies anand 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. During 2011, we returned $17.1 million

The following table summarizes the restructured loans as of TDRs to accruing status.

Defaulted TDRs are defined as loans having a payment defaultthe dates presented:

 December 31, 2014 December 31, 2013
(dollars in thousands)
Performing
TDRs

Nonperforming
TDRs

Total
TDRs

 
Performing
TDRs

Nonperforming
TDRs

Total
TDRs

Commercial real estate$16,939
$2,180
$19,119
 $19,711
$3,898
$23,609
Commercial and industrial8,074
356
8,430
 7,521
1,884
9,405
Commercial construction5,736
1,869
7,605
 5,338
2,708
8,046
Residential mortgage2,839
459
3,298
 2,581
1,356
3,937
Home equity3,342
562
3,904
 3,924
218
4,142
Installment and other consumer53
10
63
 154
3
157
Total$36,983
$5,436
$42,419
 $39,229
$10,067
$49,296

85
Table of 90 days or more after the restructuring takes place. During 2011, we had two commercial real estate loans totaling $0.9 million default. No other TDRs that existed at December 31, 2011 have defaulted.

During the year ended December 31, 2011, we modified $6.9 million of commercial and industrial loans, $6.6 million of commercial real estate loans, $4.5 million of commercial construction loans and $2.1 million of residential real estate for financially troubled borrowers that were not considered to be TDRs. These borrowers received modifications that represented insignificant delays in the timing of payments that were not considered to be concessions. TDRs increased significantly during 2011 as we are working closely with our customers during these challenging economic times.

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NOTE 7. LOANS AND LOANS HELD FOR SALE —-- continued



The following table presentstables present the restructured loans for the periods stated:

   2011   2010 
    Performing
TDRs		   Nonperforming
TDRs		   Total
TDRs		   Performing
TDRs		   Nonperforming
TDRs		   Total
TDRs		 
(in thousands)                        

Commercial real estate

  $22,284    $10,871    $33,155    $1,194    $29,636    $30,830  

Commercial and industrial

   6,180     —     6,180     37     1,000     1,037  

Commercial construction

   19,682     2,943     22,625     —     2,143     2,143  

Residential mortgage

   1,570     4,370     5,940     908     —     908  

Total

  $49,716    $18,184    $67,900    $2,139    $32,779    $34,918  

The following table include the number of TDRs, as well as both the pre-modification and post-modification recorded investments, by loan class, of those loans restructured identified during the year12 months ended December 31:

    2011 
    Number of
Loans		   Pre-Modification
Outstanding
Recorded
Investment(1)		   Post-Modification
Outstanding
Recorded
Investment(1)		   Total Difference
in Recorded
Investment		 
(in thousands)                

Commercial real estate

   8    $6,077    $5,329    $(748) 

Commercial and industrial

   6     6,364     6,180     (184) 

Commercial construction

   12     21,029     20,979     (50) 

Residential mortgage

   9     5,612     5,173     (439) 

Total

   35    $39,082    $37,661    $(1,421) 
 2014
(dollars in thousands)
Number of
Loans

 
Pre-Modification
Outstanding
Recorded
Investment(1)

 
Post-Modification
Outstanding
Recorded
Investment(1)

 
Total
Difference
in Recorded
Investment

Commercial real estate       
Principal deferral4
 $1,991
 $1,965
 $26
Commercial and industrial       
Principal deferral2
 $381
 $356
 $25
Commercial construction       
Maturity date extension1
 1,019
 974
 45
Residential mortgage       
Chapter 7 bankruptcy(2)
9
 651
 634
 17
Home equity       
Maturity date extension6
 349
 348
 1
Interest rate reduction and maturity date extension2
 96
 95
 1
Chapter 7 bankruptcy(2)
15
 432
 382
 50
Installment and other consumer       
Chapter 7 bankruptcy(2)
5
 30
 23
 7
Total by Concession Type       
Principal deferral6
 2,372
 2,321
 51
Interest rate reduction and maturity date extension2
 96
 95
 1
Maturity date extension7
 1,368
 1,322
 46
Chapter 7 bankruptcy(2)
29
 1,113
 1,039
 74
Total44
 $4,949
 $4,777
 $172
(1)

(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.

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NOTE 7. LOANS AND LOANS HELD FOR SALE -- continued


 2013
(dollars in thousands)
Number of
Loans

 
Pre-Modification
Outstanding
Recorded
Investment(1)

 
Post-Modification
Outstanding
Recorded
Investment(1)

 
Total
Difference
in Recorded
Investment

Commercial real estate       
Principal deferral4
 $2,772
 $2,494
 $(278)
Interest rate reduction and maturity date extension2
 664
 636
 (28)
Principal forgiveness (2)
1
 4,339
 4,216
 (123)
Maturity date extension1
 219
 219
 —
Chapter 7 bankruptcy(3)
6
 227
 190
 (37)
Commercial and industrial       
Principal deferral2
 $670
 $638
 $(32)
Maturity date extension1
 751
 739
 (12)
Chapter 7 bankruptcy(3)
1
 3
 1
 (2)
Residential mortgage       
Principal deferral2
 153
 149
 (4)
Interest rate reduction1
 54
 54
 —
Chapter 7 bankruptcy(3)
8
 617
 592
 (25)
Home Equity       
Principal deferral1
 174
 17
 (157)
Chapter 7 bankruptcy(3)
30
 1,032
 982
 (50)
Installment and other consumer       
Chapter 7 bankruptcy(3)
11
 104
 91
 (13)
Total by Concession Type       
Principal deferral9
 3,769
 3,298
 (471)
Interest rate reduction1
 54
 54
 —
Interest rate reduction and maturity date extension2
 664
 636
 (28)
Principal forgiveness (2)
1
 4,339
 4,216
 (123)
Maturity date extension2
 970
 958
 (12)
Chapter 7 bankruptcy(3)
56
 1,983
 1,856
 (127)
Total71
 $11,779
 $11,018
 $(761)
(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)This loan had debt forgiveness of $0.1 million to the customer; however, the loan was previously charged-off to a balance below the actual contractual balance.
(3)Chapter 7 bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.
During 2014, we modified six loans that were not considered to be TDRs, including four C&I loans for $3.2 million and two CRE loans for $1.2 million. The modifications primarily represented instances where we were adequately compensated through additional collateral or a higher interest rate or there was an insignificant delay in payment. As of December 31, 2014, we have no commitments to lend additional funds on any TDRs.
We returned nine TDRs to accruing status during the twelve months ended December 31, 2014 totaling $1.9 million. We returned six TDRs to accruing status during 2013 totaling $6.9 million.

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NOTE 7. LOANS AND LOANS HELD FOR SALE -- continued


Defaulted TDRs are loans having a payment default of 90 days or more after the restructuring takes place. The following table is a summary of TDRs which defaulted during the years ended December 31, 2014 and 2013 that had been restructured within the last 12 months prior to defaulting:
 Defaulted TDRs
 For the
Year Ended
December 31, 2014		 For the
Year Ended
December 31, 2013
(dollars in thousands)
Number of
Defaults

Recorded
Investment

 
Number of
Defaults

Recorded
Investment

Commercial real estate—
$—
 1
$75
Commercial and industrial—
—
 2
438
Residential real estate1
20
 8
607
Home equity2
44
 6
193
Total3
$64
 17
$1,313
The following table is a summary of nonperforming assets as of the dates presented:
 December 31,
(dollars in thousands)20142013
Nonperforming Assets  
Nonaccrual loans$7,021
$12,387
Nonaccrual TDRs5,436
10,067
Total nonaccrual loans12,457
22,454
OREO166
410
Total Nonperforming Assets$12,623
$22,864
OREO consists of five properties and is included in other assets in the Consolidated Balance Sheets. It is our policy to obtain OREO appraisals on an annual basis.
We have granted loans to certain officers and directors of S&T as well as to certain affiliates of the officers and directors in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectability.

The following table presents a summary of the aggregate amount of loans to any such persons as of December 31:

    2011  2010 
(in thousands)       

Balance at beginning of year

  $34,373   $34,136  

New loans

   23,751    20,594  

Repayments

   (26,303)   (20,357) 

Balance at End of Year

  $31,821   $34,373  
(dollars in thousands)20142013
Balance at beginning of year$23,848
$36,075
New loans27,799
22,534
Repayments(24,279)(34,761)
Balance at End of Year$27,368
$23,848


NOTE 8. ALLOWANCE FOR LOAN LOSSES

We maintain an ALL at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. Refer to Note 1 Summary of Significant Accounting Policies for details of our ALL policy. During the fourth quarter of 2010, we implemented various enhancements to the ALL methodology to better align the calculation with the inherent risk

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NOTE 8. ALLOWANCE FOR LOAN LOSSES — continued

identified within the loan portfolio and align it with the regulatory guidance. Changes included consideration of additional loan risk characteristics such as internal risk rating, collateral, and loan-to-value, enhancing the base loss calculation to consider the estimated loss emergence period of each loan segment and expanding the qualitative adjustments to consider additional factors. The enhancements made to the ALL methodology did not materially change the ALL at December 31, 2010.

We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.

The following are key risks within each portfolio segment:


CRE—Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. OperationOperations 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.



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NOTE 8. ALLOWANCE FOR LOAN LOSSES -- continued

C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.


Commercial Construction—Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be complete, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.


Consumer Real Estate—Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this portfoliosegment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.


Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and first or second lien positionsLTV ratio for consumer real estateConsumer Real Estate loans. Historical loss rates are applied to these loan pools to determine the general reserve component of the ALL. Management monitors various credit quality indicators for both the commercial and consumer loan portfolios,

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NOTE 8. ALLOWANCE FOR LOAN LOSSES — continued

including delinquency, nonperforming status and changes in risk ratings on a monthly basis. Refer to Note 1 Summary of Significant Accounting Policiesloans collectively evaluated for our policy for determining past due status of loans.

impairment.

The following tables present the age analysis of past due loans segregated by class of loans at December 31:

2011  Current   30-59 Days
Past Due		   60-89 Days
Past Due		   

Non-

performing

   Total
Past Due
Loans		   Total Loans 
(in thousands)                        

Commercial real estate

  $1,374,580    $7,657    $1,448    $31,648    $40,753    $1,415,333  

Commercial and industrial

   672,899     3,583     1,701     7,570     12,854     685,753  

Commercial construction

   182,305     —     —     6,547     6,547     188,852  

Home equity

   405,578     2,199     691     2,936     5,826     411,404  

Residential mortgage

   349,214     1,240     1,163     7,229     9,632     358,846  

Installment and other consumer

   66,675     382     70     4     456     67,131  

Consumer construction

   2,259     —     —     181     181     2,440  

Total

  $3,053,510    $15,061    $5,073    $56,115    $76,249    $3,129,759  

2010  Current   30-59 Days
Past Due		   60-89 Days
Past Due		   

Non-

performing

   Total
Past Due
Loans		   Total Loans 
(in thousands)                        

Commercial real estate

  $1,445,521    $3,135    $1,236    $44,310    $48,681    $1,494,202  

Commercial and industrial

   717,078     975     739     3,567     5,281     722,359  

Commercial construction

   250,776     99     736     7,987     8,822     259,598  

Home equity

   437,212     1,744     707     1,433     3,884     441,096  

Residential mortgage

   352,194     930     416     5,996     7,342     359,536  

Installment and other consumer

   74,373     275     67     65     407     74,780  

Consumer construction

   3,494     —     —     525     525     4,019  

Total

  $3,280,648    $7,158    $3,901    $63,883    $74,942    $3,355,590  

as of the dates presented:

 December 31, 2014
(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$1,674,930
$2,548
$323
$4,435
$7,306
$1,682,236
Commercial and industrial991,136
1,227
153
1,622
3,002
994,138
Commercial construction214,174
—
—
1,974
1,974
216,148
Residential mortgage485,465
565
1,220
2,336
4,121
489,586
Home equity414,303
1,756
445
2,059
4,260
418,563
Installment and other consumer65,111
352
73
31
456
65,567
Consumer construction2,508
—
—
—
—
2,508
Total$3,847,627
$6,448
$2,214
$12,457
$21,119
$3,868,746

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NOTE 8. ALLOWANCE FOR LOAN LOSSES -- continued

 December 31, 2013
(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$1,595,590
$1,209
$207
$10,750
$12,166
$1,607,756
Commercial and industrial836,276
2,599
278
3,296
6,173
842,449
Commercial construction139,133
1,049
751
2,742
4,542
143,675
Residential mortgage481,260
828
1,666
3,338
5,832
487,092
Home equity408,777
2,468
659
2,291
5,418
414,195
Installment and other consumer67,420
382
44
37
463
67,883
Consumer construction3,149
—
—
—
—
3,149
Total$3,531,605
$8,535
$3,605
$22,454
$34,594
$3,566,199
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 and substandard, which generally have an increasing risk of loss.

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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NOTE 8. ALLOWANCE FOR LOAN LOSSES — continuedSubstandard

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 at December 31:

2011  Commercial
Real Estate		   Commercial
and Industrial		   Commercial
Construction		   Total 
(in thousands)                

Pass

  $1,229,005    $600,895    $136,270    $1,966,170  

Special mention

   84,400     33,135     17,106     134,641  

Substandard

   101,928     51,723     35,476     189,127  

Total

  $1,415,333    $685,753    $188,852    $2,289,938  

2010  Commercial
Real Estate		   Commercial
and Industrial		   Commercial
Construction		   Total 
(in thousands)                

Pass

  $1,297,242    $619,011    $221,492    $2,137,745  

Special mention

   86,653     76,158     16,308     179,119  

Substandard

   110,307     27,190     21,798     159,295  

Total

  $1,494,202    $722,359    $259,598    $2,476,159  

as of the dates presented:

 December 31, 2014
(dollars in thousands)
Commercial
Real Estate

% of
Total

 
Commercial
and Industrial

% of
Total

 
Commercial
Construction

% of
Total

 Total
% of
Total

Pass$1,635,132
97.2% $948,663
95.4% $196,520
90.9% $2,780,315
96.1%
Special mention23,597
1.4% 30,357
3.1% 12,014
5.6% 65,968
2.3%
Substandard23,507
1.4% 15,118
1.5% 7,614
3.5% 46,239
1.6%
Total$1,682,236
100.0% $994,138
100.0% $216,148
100.0% $2,892,522
100.0%
 December 31, 2013
(dollars in thousands)
Commercial
Real Estate

% of
Total

 
Commercial
and Industrial

% of
Total

 
Commercial
Construction

% of
Total

 Total
% of
Total

Pass$1,519,720
94.5% $792,029
94.0% $119,177
82.9% $2,430,926
93.7%
Special mention57,073
3.6% 34,085
4.1% 15,621
10.9% 106,779
4.1%
Substandard30,963
1.9% 16,335
1.9% 8,877
6.2% 56,175
2.2%
Total$1,607,756
100.0% $842,449
100.0% $143,675
100.0% $2,593,880
100.0%
We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans.

The following tables present the recorded investment in consumer loan classes by performing and nonperforming status at December 31:

2011  Home
Equity		   Residential
Mortgage		   Installment
and other
consumer		   Consumer
Construction		   Total 
(in thousands)                    

Performing

  $408,468    $351,617    $67,127    $2,259    $829,471  

Nonperforming

   2,936     7,229     4     181     10,350  

Total

  $411,404    $358,846    $67,131    $2,440    $839,821  

2010  Home
Equity		   Residential
Mortgage		   Installment
and other
consumer		   Consumer
Construction		   Total 
(in thousands)                    

Performing

  $439,663    $353,540    $74,715    $3,494    $871,412  

Nonperforming

   1,433     5,996     65     525     8,019  

Total

  $441,096    $359,536    $74,780    $4,019    $879,431  

PAGE 97

as of the dates presented:


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NOTE 8. ALLOWANCE FOR LOAN LOSSES —-- continued


 December 31, 2014
(dollars in
thousands)
Residential
Mortgage

% of
Total

Home
Equity

% of
Total

Installment
and other
consumer

% of
Total

Consumer
Construction

% of
Total

Total
% of
Total

Performing$487,250
99.5%$416,504
99.5%$65,536
99.9%$2,508
100.0%$971,798
99.5%
Nonperforming2,336
0.5%2,059
0.5%31
0.1%—
—%4,426
0.5%
Total$489,586
100.0%$418,563
100.0%$65,567
100.0%$2,508
100.0%$976,224
100.0%
 December 31, 2013
(dollars in
thousands)
Residential
Mortgage

% of
Total

Home
Equity

% of
Total

Installment
and other
consumer

% of
Total

Consumer
Construction

% of
Total

Total
% of
Total

Performing$483,754
99.3%$411,904
99.4%$67,846
99.9%$3,149
100.0%$966,653
99.4%
Nonperforming3,338
0.7%2,291
0.6%37
0.1%—
—%5,666
0.6%
Total$487,092
100.0%$414,195
100.0%$67,883
100.0%$3,149
100.0%$972,319
100.0%
We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All TDRs are considered to be impaired loans and will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.


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NOTE 8. ALLOWANCE FOR LOAN LOSSES -- continued

The following tables presenttable presents investments in loans considered to be impaired and related information on those impaired loans as of the dates presented:
 December 31, 2014 December 31, 2013
(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$—
$—
$—
 $—
$—
$—
Commercial and industrial—
—
—
 —
—
—
Commercial construction—
—
—
 681
1,383
25
Consumer real estate43
43
43
 53
53
53
Other consumer20
20
11
 33
33
19
Total with a Related Allowance Recorded63
63
54
 767
1,469
97
Without a related allowance recorded:       
Commercial real estate19,890
25,262
—
 26,968
35,474
—
Commercial and industrial9,218
9,449
—
 9,580
9,703
—
Commercial construction7,605
11,293
—
 7,391
12,353
—
Consumer real estate7,159
7,733
—
 8,026
9,464
—
Other consumer42
48
—
 124
128
—
Total without a Related Allowance Recorded43,914
53,785
—
 52,089
67,122
—
Total:       
Commercial real estate19,890
25,262
—
 26,968
35,474
—
Commercial and industrial9,218
9,449
—
 9,580
9,703
—
Commercial construction7,605
11,293
—
 8,072
13,736
25
Consumer real estate7,202
7,776
43
 8,079
9,517
53
Other consumer62
68
11
 157
161
19
Total$43,977
$53,848
$54
 $52,856
$68,591
$97


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NOTE 8. ALLOWANCE FOR LOAN LOSSES -- continued

The following table summarizes investments in loans considered to be impaired and related information on those impaired loans for the years ended December 31:

   December 31, 2011   Year Ended December 31, 2011 
    Recorded
Investment		   Unpaid
Principal
Balance		   Related
Allowance		   Average
Recorded
Investment		   Interest
Income
Recognized		 
(in thousands)                    

With a related allowance recorded:

          

Commercial real estate

  $9,049    $9,276    $3,487    $12,045    $320  

Commercial and industrial

   4,207     4,207     1,116     3,497     77  

Commercial construction

   1,975     1,975     942     3,326     4  

Consumer real estate

   —     —     —     173     —  

Total with a Related Allowance Recorded

   15,231     15,458     5,545     19,041     401  

Without a related allowance recorded:

          

Commercial real estate

   41,058     47,874  ��  —     34,965     1,415  

Commercial and industrial

   7,784     7,784     —     4,128     132  

Commercial construction

   24,024     24,375     —     8,856     496  

Consumer real estate

   5,939     6,545     —     2,617     195  

Total without a Related Allowance Recorded

   78,805     86,578     —     50,566     2,238  

Total:

          

Commercial real estate

   50,107     57,150     3,487     47,010     1,735  

Commercial and industrial

   11,991     11,991     1,116     7,625     209  

Commercial construction

   25,999     26,350     942     12,182     500  

Consumer real estate

   5,939     6,545     —     2,790     195  

Total

  $94,036    $102,036    $5,545    $69,607    $2,639  

PAGE 98

NOTE 8. ALLOWANCE FOR LOAN LOSSES — continued

As of December 31, 2011, commercial real estate loans of $50.1 million comprised 53 percent of the total impaired loans of $94.0 million. These impaired loans are collateralized primarily by commercial real estate properties such as retail or strip malls, office buildings, hotels and various other types of commercial purpose properties. These loans are generally considered collateral dependent and charge-offs are recorded when a confirmed loss exists. Approximately $11.2 million of charge-offs have been recorded relating to these commercial real estate loans over the life of these loans. It is our policy to order appraisals on an annual basis on impaired loans or sooner if facts and circumstances warrant otherwise. As of December 31, 2011, updated appraisals completed within the last 12 months exist for these loans and aggregate an estimated fair value less cost to sell of approximately $61.3 million.

   December 31, 2010   Year Ended December 31, 2010 
    Recorded
Investment		   Unpaid
Principal
Balance		   Related
Allowance		   Average
Recorded
Investment		   Interest
Income
Recognized		 
(in thousands)                    

With a related allowance recorded:

          

Commercial real estate

  $10,152    $11,466    $1,992    $21,023    $489  

Commercial and industrial

   1,263     1,263     337     1,623     22  

Commercial construction

   4,662     4,662     1,302     7,165     —  

Total with a Related Allowance
Recorded

   16,077     17,391     3,631     29,811     511  

Without a related allowance recorded:

          

Commercial real estate

   29,788     37,567     —     28,074     442  

Commercial and industrial

   1,491     3,280     —     1,370     —  

Commercial construction

   3,325     4,853     —     7,202     20  

Total without a Related Allowance Recorded

   34,604     45,700     —     36,646     462  

Total:

          

Commercial real estate

   39,940     49,033     1,992     49,097     931  

Commercial and industrial

   2,754     4,543     337     2,993     22  

Commercial construction

   7,987     9,515     1,302     14,367     20  

Total

  $50,681    $63,091    $3,631    $66,457    $973  

presented:

 For the Year Ended
 December 31, 2014 December 31, 2013
(dollars in thousands)
Average
Recorded
Investment

Interest
Income
Recognized

 
Average
Recorded
Investment

Interest
Income
Recognized

With a related allowance recorded:     
Commercial real estate$—
$—
 $1,895
$—
Commercial and industrial—
—
 —
—
Commercial construction—
—
 1,652
49
Consumer real estate48
4
 60
6
Other consumer24
2
 24
4
Total with a Related Allowance Recorded72
6
 3,631
59
Without a related allowance recorded:     
Commercial real estate20,504
684
 29,314
929
Commercial and industrial9,246
241
 11,439
254
Commercial construction8,145
227
 14,112
326
Consumer real estate7,027
396
 8,714
436
Other consumer56
2
 114
6
Total without a Related Allowance Recorded44,978
1,550
 63,693
1,951
Total:     
Commercial real estate20,504
684
 31,209
929
Commercial and industrial9,246
241
 11,439
254
Commercial construction8,145
227
 15,764
375
Consumer real estate7,074
400
 8,774
442
Other consumer81
4
 138
10
Total$45,050
$1,556
 $67,324
$2,010
The following tables detail activity in the ALL for the years ended December 31:

   2011 
    Commercial
Real Estate		  Commercial and
Industrial		  Commercial
Construction		  Consumer
Real Estate		  Other
Consumer		  Total Loans 
(in thousands)                   

Balance at beginning of year

  $30,425   $9,777   $5,904   $3,962   $1,319   $51,387  

Charge-offs

   (8,824)   (8,971)   (1,720)   (2,617)   (1,013)   (23,145) 

Recoveries

   780    357    2,463    1,030    360    4,990  

Net (Charge-offs)/ Recoveries

   (8,044)   (8,614)   743    (1,587)   (653)   (18,155) 

Provision for loan losses

   7,423    10,111    (2,944)   791    228    15,609  

Balance at End of Year

  $29,804   $11,274   $3,703   $3,166   $894   $48,841  

PAGE 99

periods presented:

 2014
(dollars in thousands)
Commercial
Real Estate

Commercial
and Industrial

Commercial
Construction

Consumer
Real Estate

Other
Consumer

Total Loans
Balance at beginning of year$18,921
$14,433
$5,374
$6,362
$1,165
$46,255
Charge-offs(2,041)(1,267)(712)(1,200)(1,133)(6,353)
Recoveries1,798
3,647
146
350
353
6,294
Net (Charge-offs)/ Recoveries(243)2,380
(566)(850)(780)(59)
Provision for loan losses1,486
(3,145)1,285
821
1,268
1,715
Balance at End of Year$20,164
$13,668
$6,093
$6,333
$1,653
$47,911

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NOTE 8. ALLOWANCE FOR LOAN LOSSES —-- continued

  2010    2009 
   Commercial
Real Estate		  Commercial and
Industrial		  Commercial
Construction		  Consumer
Real Estate		  Other
Consumer		  Total Loans    Total Loans 
(in thousands)                       

Balance at beginning of year

 $27,322   $21,393   $8,008   $501   $2,356   $59,580    $42,689  

Charge-offs

  (23,925)   (7,277)   (6,354)   (2,210)   (1,261)   (41,027)    (56,862) 

Recoveries

  575    329    1,749    201    469    3,323     1,399  

Net (Charge-offs)/ Recoveries

  (23,350)   (6,948)   (4,605)   (2,009)   (792)   (37,704)    (55,463) 

Provision for loan losses

  26,453    (4,668)   2,501    5,470    (245)   29,511     72,354  

Balance at End of Year

 $30,425   $9,777   $5,904   $3,962   $1,319   $51,387    $59,580  


 2013
(dollars in thousands)
Commercial
Real Estate

Commercial
and Industrial

Commercial
Construction

Consumer
Real Estate

Other
Consumer

Total Loans
Balance at beginning of year$25,246
$7,759
$7,500
$5,058
$921
$46,484
Charge-offs(4,601)(2,714)(4,852)(2,407)(1,002)(15,576)
Recoveries3,388
2,142
531
651
324
7,036
Net (Charge-offs)/ Recoveries(1,213)(572)(4,321)(1,756)(678)(8,540)
Provision for loan losses(5,112)7,246
2,195
3,060
922
8,311
Balance at End of Year$18,921
$14,433
$5,374
$6,362
$1,165
$46,255
The following tables present the ALL and recorded investments in loans by category as of December 31:

   Allowance for Loan Losses   Portfolio Loans 
2011  Individually
Evaluated for
Impairment		   Collectively
Evaluated for
Impairment		   Total   Individually
Evaluated for
Impairment		   Collectively
Evaluated for
Impairment		   Total 
(in thousands)                        

Commercial real estate

  $3,487    $26,317    $29,804    $50,107    $1,365,226    $1,415,333  

Commercial and industrial

   1,116     10,158     11,274     11,991     673,762     685,753  

Commercial construction

   942     2,761     3,703     25,999     162,853     188,852  

Consumer real estate

   —     3,166     3,166     5,939     766,751     772,690  

Other consumer

   —     894     894     —     67,131     67,131  

Total

  $5,545    $43,296    $48,841    $94,036    $3,035,723    $3,129,759  

   Allowance for Loan Losses   Portfolio Loans 
2010  Individually
Evaluated for
Impairment		   Collectively
Evaluated for
Impairment		   Total   Individually
Evaluated for
Impairment		   Collectively
Evaluated for
Impairment		   Total 
(in thousands)                        

Commercial real estate

  $1,992    $28,432    $30,424    $39,940    $1,454,262    $1,494,202  

Commercial and industrial

   337     9,440     9,777     2,754     719,605     722,359  

Commercial construction

   1,302     4,603     5,905     7,987     251,611     259,598  

Consumer real estate

   —     3,962     3,962     —     804,651     804,651  

Other consumer

   —     1,319     1,319     —     74,780     74,780  

Total

  $3,631    $47,756    $51,387    $50,681    $3,304,909    $3,355,590  

PAGE 100

 2014
 Allowance for Loan LossesPortfolio Loans
(dollars in thousands)
Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Commercial real estate$—
$20,164
$20,164
$19,890
$1,662,346
$1,682,236
Commercial and industrial—
13,668
13,668
9,218
984,920
994,138
Commercial construction—
6,093
6,093
7,605
208,543
216,148
Consumer real estate43
6,290
6,333
7,202
903,455
910,657
Other consumer11
1,642
1,653
62
65,505
65,567
Total$54
$47,857
$47,911
$43,977
$3,824,769
$3,868,746
 2013
 Allowance for Loan LossesPortfolio Loans
(dollars in thousands)
Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Individually
Evaluated for
Impairment

Collectively
Evaluated for
Impairment

Total
Commercial real estate$—
$18,921
$18,921
$26,968
$1,580,788
$1,607,756
Commercial and industrial—
14,433
14,433
9,580
832,869
842,449
Commercial construction25
5,349
5,374
8,072
135,603
143,675
Consumer real estate53
6,309
6,362
8,079
896,357
904,436
Other consumer19
1,146
1,165
157
67,726
67,883
Total$97
$46,158
$46,255
$52,856
$3,513,343
$3,566,199

NOTE 9. PREMISES AND EQUIPMENT

The following table is a summary of premises and equipment at December 31:

    2011  2010 
(in thousands)       

Land

  $6,316   $6,384  

Premises

   41,608    41,470  

Furniture and equipment

   22,941    22,552  

Leasehold improvements

   4,899    4,781  
   75,764    75,187  

Accumulated depreciation

   (38,009)   (35,233) 

Total

  $37,755   $39,954  

as of the dates presented:

 December 31,
(dollars in thousands)20142013
Land$6,193
$6,193
Premises44,690
42,320
Furniture and equipment26,661
25,139
Leasehold improvements6,545
5,944
 84,089
79,596
Accumulated depreciation(45,923)(42,981)
Total$38,166
$36,615
Depreciation expense related to premises and equipment was $4.3$3.5 million for each of the years 2011, 2010in 2014, $3.5 million in 2013 and 2009.

$3.9 million in 2012.

Certain banking facilities are leased under lease arrangements expiring at various dates until the year 2054. Those which contain escalation clauses, where the rent increases over the term of the lease, are accountedWe account for these leases on a straight-line basis.basis due to escalation clauses. All leases are accounted for as operating leases, except for one capital lease. Rental expense for premises amounted to $1.9$2.7 million, $1.7$2.5 million and $1.9$2.4 million in 2011, 20102014, 2013 and 2009, respectively.2012. Included in

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NOTE 9. PREMISES AND EQUIPMENT -- continued


the rental expense for premises are leases entered into with two S&T directors, which totaled $0.2 million for each of the years ended 2011, 2010year in 2014, 2013 and 2009.

2012.

Minimum annual rental and renewal option payments for each of the following five years and thereafter are approximately:

    Operating   Capital   Total 
(in thousands)            

2012

  $1,548    $76    $1,624  

2013

   1,564     76     1,640  

2014

   1,581     76     1,657  

2015

   1,583     76     1,659  

2016

   1,535     76     1,611  

Thereafter

   32,534     916     33,450  

Total

  $40,345    $1,296    $41,641  
(dollars in thousands)Operating
Capital
Total
2015$2,274
$76
$2,350
20162,200
76
2,276
20172,178
76
2,254
20182,143
76
2,219
20192,156
77
2,233
Thereafter40,352
687
41,039
Total$51,303
$1,068
$52,371

NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table represents a roll forwardpresents goodwill as of goodwill:

    2011   2010 
(in thousands)        

Balance at beginning of year

  $165,273    $165,167  

Additions

   —     106  

Balance at End of Year

  $165,273    $165,273  

PAGE 101

NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS — continuedthe dates presented:

 December 31,
(dollars in thousands)20142013
Balance at beginning of year$175,820
$175,733
Additions—
87
Balance at End of Year$175,820
$175,820
Goodwill represents the excess of the purchase price over the fair value of net assets purchased.acquired. Goodwill is reviewed for impairment annually with an interimor more frequently if it is determined that a triggering event has occurred. Based upon our qualitative assessment performed for our annual impairment analysis, performed when necessary.

During the third quarter of 2011, our stock traded below common book value for an extended period of time. As a result, we engaged a third party to provide current market data for recent bank merger and acquisition transactions. The market data included transactions from January 2010 to August 2011 and indicatedconcluded that transactions were occurring in excess of common book value of 70.3 percent (median). This data supported our conclusion that the fair value exceeds the carrying value and no further valuation procedures were completed. At December 31, 2011, our stock was trading in excess of 10 percent above common book value.

We completed the annual goodwill impairment assessment as required in 2011 and 2010; the results indicatedit is more likely than not that the fair value of eachthe reporting unit exceededunits exceeds the carrying value. We determinedIn general, the overall macroeconomic conditions and more specifically the economic conditions of the banking industry have continued to improve. Additionally, our overall performance has improved and we did not identify any other facts and circumstances causing us to conclude that goodwillit is more likely than not impaired.

that the fair value of the reporting units would be less than the carrying value.

The following table shows a summary of intangible assets:

    2011  2010 
(in thousands)       

Gross carrying amount at beginning of year

  $15,070   $15,070  

Accumulated amortization

   (9,342)   (7,605) 

Balance at End of Year

  $5,728   $7,465  

assets as of the dates presented:

 December 31,
(dollars in thousands)20142013
Gross carrying amount at beginning of year$16,401
$16,401
Additions—
—
Accumulated amortization(13,770)(12,642)
Balance at End of Year$2,631
$3,759
Intangible assets as of December 31, 20112014 consisted of $4.9$2.1 million for the acquisition of core deposits, $0.2$0.1 million for the acquisition of wealth management relationships and $0.6$0.4 million for the acquisition of insurance contract relationships. We determined the amount of identifiable intangible assets based upon independent core deposit, wealth management and insurance contract analyses. We did not record any intangible assets in 2011 or 2010.valuations. Other intangible assets are evaluated for recoverability annually and more frequently if triggeringimpairment whenever events andor changes in circumstances occur. We completed this reviewindicate that their carrying amounts may not be recoverable. There were no triggering events in 2011 and 2010 and determined that other intangible assets are not impaired.

2014 requiring an impairment analysis to be completed.


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NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS -- continued

Amortization expense on finite-lived intangible assets totaled $1.1 million, $1.6 million and $1.7 million $1.9 millionfor 2014, 2013 and $2.3 million for 2011, 2010 and 2009, respectively.2012. The following is a summary of the expected amortization expense for finite-lived intangibles assets, assuming no new additions, for each of the five years following December 31, 2011:

    Amount 
(in thousands)    

2012

  $1,542  

2013

   1,337  

2014

   911  

2015

   716  

2016

   520  

Total

  $5,026  
2014:
(dollars in thousands)Amount
  
2015$883
2016645
2017500
2018134
2019122
Total$2,284

NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, we use derivative instruments and hedging activities as discussed under Derivative Financial Instruments in Note 1 Summary of Significant Accounting Policies.

PAGE 102

NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES — continued

The following table indicates the amount representing the value of derivative assets and derivative liabilities at December 31:

   Derivatives (included in
Other Assets)		   Derivatives (included
in Other Liabilities)		 
    2011   2010   2011   2010 
(in thousands)                

Derivatives not Designated as Hedging Instruments

        

Interest Rate Swaps—Commercial Loans

        

Fair value

  $23,764    $17,518    $23,639    $17,355  

Notional amount

   189,868     211,078     189,868     211,078  

Collateral posted

   —     —     20,273     13,928  

Interest Rate Lock Commitments—Mortgage Loans

        

Fair value

   244     217     —     —  

Notional amount

   7,093     17,033     —     —  

Forward Sale Contracts—Mortgage Loans

        

Fair value

   —     412     95     —  

Notional amount

   —     21,785     7,729     —  

 
Derivatives (included in
Other Assets)
Derivatives (included
in Other Liabilities)
(dollars in thousands)2014201320142013
Derivatives not Designated as Hedging Instruments    
Interest Rate Swap Contracts—Commercial Loans    
Fair value$12,981
$13,698
$12,953
$13,647
Notional amount245,152
261,754
245,152
261,754
Collateral posted—
—
12,059
12,611
Interest Rate Lock Commitments—Mortgage Loans    
Fair value235
85
—
—
Notional amount8,822
3,989
—
—
Forward Sale Contracts—Mortgage Loans    
Fair value—
34
57
—
Notional amount—
5,250
7,789
—
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 at December 31:
 
Derivatives (included
in Other Assets)
Derivatives (included
in Other Liabilities)
(dollars in thousands)2014201320142013
Derivatives not Designated as Hedging Instruments    
Gross amounts recognized$13,203
$14,012
$13,175
$13,961
Gross amounts offset(222)(314)(222)(314)
Net amounts presented in the Consolidated Balance Sheets12,981
13,698
12,953
13,647
Gross amounts not offset(1)
—
—
(12,059)(12,611)
Net Amount$12,981
$13,698
$894
$1,036
(1)Amounts represent posted collateral.

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NOTE 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- continued

The following table indicates the gain or loss recognized in income on derivatives for the yearyears ended December 31:

    2011  2010   2009 
(in thousands)           

Derivatives not Designated as Hedging Instruments

     

Interest rate swaps—commercial loans

  $(38)  $96    $(616) 

Interest rate lock commitments—mortgage loans

   27    62     6  

Forward sale contracts—mortgage loans

   (507)   220     242  

Total Derivative (Loss) Gain

  $(518)  $378    $(368) 
(dollars in thousands)2014
2013
2012
Derivatives not Designated as Hedging Instruments   
Interest rate swap contracts—commercial loans$(24)$(174)$101
Interest rate lock commitments—mortgage loans150
(382)223
Forward sale contracts—mortgage loans(90)82
47
Total Derivative Gain (Loss)$36
$(474)$371

NOTE 12. MORTGAGE SERVICING RIGHTS

For the years ended December 31, 2011, 20102014, 2013 and 2009,2012, the 1-4 family mortgage loans that were sold to Federal National Mortgage Association, or FNMA,Fannie Mae amounted to $67.9$40.1 million, $109.3$62.9 million and $133.5 million respectively.$82.9 million. At December 31, 2011, 20102014, 2013 and 20092012 our servicing portfolio totaled $332.6$325.8 million, $318.2$327.4 million and $255.9 million, respectively.

$329.2 million.

The following table indicates mortgage servicing rightsMSRs and the net carrying values:

    Servicing
Rights		  Valuation
Allowance		   Net Carrying
Value		 
(in thousands)           

Balance at December 31, 2009

  $2,692   $592    $2,100  

Additions

   1,006    233     773  

Amortization

   (406)   —     (406) 

Balance at December 31, 2010

  $3,292   $825    $2,467  

Additions

   621    342     279  

Amortization

   (593)   —     (593) 

Balance at December 31, 2011

  $3,320   $1,167    $2,153  

PAGE 103

(dollars in thousands)
Servicing
Rights

Valuation
Allowance

Net Carrying
Value

Balance at December 31, 2012$3,206
$(1,100)$2,106
Additions780
—
780
Amortization(778)—
(778)
Temporary impairment recapture—
811
811
Balance at December 31, 2013$3,208
$(289)$2,919
Additions431
—
431
Amortization(531)—
(531)
Temporary impairment—
(2)(2)
Balance at December 31, 2014$3,108
$(291)$2,817

NOTE 13. DEPOSITS

The following table presents the composition of deposits at December 31 and interest expense for the years ended December 31:

    2011   2010   2009 
  Balance   Interest
Expense		   Balance   Interest
Expense		   Balance   Interest
Expense		 
(in thousands)                        

Noninterest-bearing demand

  $818,686    $—    $765,812    $—    $712,120    $—  

Interest-bearing demand

   283,611     47     295,246     54     260,554     59  

Money market

   278,092     691     262,683     1,166     289,367     1,557  

Savings

   802,942     1,267     753,813     2,127     752,130     3,464  

Certificates of deposit

   1,152,528     20,947     1,239,970     25,370     1,290,370     33,358  

Total

  $3,335,859    $22,952    $3,317,524    $28,717    $3,304,541    $38,438  

 201420132012
(dollars in thousands)Balance
Interest
Expense

Balance
Interest
Expense

Balance
Interest
Expense

Noninterest-bearing demand$1,083,919
$—
$992,779
$—
$960,980
$—
Interest-bearing demand335,099
19
312,790
75
316,760
146
Money market376,612
572
281,403
446
361,233
528
Savings1,027,095
1,607
994,805
1,735
965,571
2,356
Certificates of deposit1,086,117
7,930
1,090,531
9,150
1,033,884
13,766
Total$3,908,842
$10,128
$3,672,308
$11,406
$3,638,428
$16,796
The aggregate of all certificates of deposit over $100,000 amounted to $357.7$382.2 million and $451.6$433.8 million at December 31, 20112014 and 2010, respectively.

2013.


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NOTE 13. DEPOSITS -- continued

The following table indicates the scheduled maturities of certificates of deposit at December 31, 2011:

    Amount 
(in thousands)    

2012

  $706,140  

2013

   218,088  

2014

   87,970  

2015

   84,167  

2016

   45,656  

Thereafter

   10,507  

Total

  $1,152,528  

PAGE 104

2014:
(dollars in thousands)Amount
  
2015$628,889
2016143,728
2017230,051
201845,139
201930,295
Thereafter8,015
Total$1,086,117

NOTE 14. SHORT-TERM BORROWINGS

Short-term borrowings are for terms under one year and were comprised of retail repurchase agreements, , or REPOs, federal funds purchased, term auction facility, or TAF borrowings and FHLB advances. We define repurchase agreementsREPOs with our local retail customers as retail REPOs. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and are therefore accounted for as a secured borrowing. Federal funds purchased are unsecured overnight borrowings with other financial institutions. TAF borrowings are collateral backed short-term loans with the Federal Reserve. FHLB advances are for various terms secured by a blanket lien on residential mortgages and other real estate secured loans.
The following table represents the composition of short-term borrowings, atthe weighted average interest rate as of December 31 and interest expense for the years ended December 31:

    2011   2010   2009 
  Balance   Interest
Expense		   Balance   Interest
Expense		   Balance   Interest
Expense		 
(in thousands)                        

Securities sold under repurchase agreements, retail

  $30,370    $53    $40,653    $64    $44,935    $141  

Federal funds purchased

   —     —     —     —     —     1  

Term auction facility

   —     —     —     —     —     18  

Federal Home Loan Bank advances

   75,000     2     —     146     51,300     526  

Total

  $105,370    $55    $40,653    $210    $96,235    $686  

In addition, we currently have a $5.0 million line of credit with S&T Bank secured by investments of another subsidiary of S&T. The line of credit has a variable rate based upon prime and is payable on demand. There were no funds drawn from this line of credit in 2011, 2010 or 2009.

Information pertaining to REPOs, federal funds purchased and TAF advances are summarized in the table below:

    2011   2010   2009 
(in thousands)            

Balance at December 31

  $30,370    $40,653    $44,935  

Average balance during the year

   41,584     46,489     94,019  

Average interest rate during the year

   0.13%     0.14%     0.17%  

Maximum month-end balance during the year

  $42,409    $52,046    $129,835  

Average interest rate at December 31

   0.11%     0.07%     0.14%  

Information pertaining to FHLB advances is summarized in the table below:

    2011   2010   2009 
(in thousands)            

Balance at December 31

  $75,000    $—    $51,300  

Average balance during the year

   551     32,473     96,929  

Average interest rate during the year

   0.32%     0.45%     0.54%  

Maximum month-end balance during the year

  $75,000    $141,800    $195,150  

Average interest rate at December 31

   0.18%     —     0.62%  

PAGE 105

 2014 2013 2012
(dollars in thousands)Balance
Weighted
Average
Interest
Rate

Interest
Expense

 Balance
Weighted
Average
Interest
Rate

Interest
Expense

 Balance
Weighted
Average
Interest
Rate

Interest
Expense

REPOs$30,605
0.01%$3
 $33,847
0.01%$62
 $62,582
0.20%$82
FHLB advances290,000
0.31%511
 140,000
0.30%279
 75,000
0.19%123
Total Short-term Borrowings$320,605
0.27%$514
 $173,847
0.24%$341
 $137,582
0.19%$205

NOTE 15. LONG-TERM BORROWINGS

We had total AND SUBORDINATED DEBT

Our long-term borrowings at the Pittsburgh FHLB as of December 31, 20112014 and 2010 at the Pittsburgh FHLB of $106.62013 were $19.3 million and $29.1 million, respectively. Total borrowings for 2011 consisted of $75.0 million in short-term borrowings and $31.6 million in long-term borrowings. The total borrowings of $29.1 million in 2010 were long-term.$21.6 million. FHLB borrowings are collateralized by a blanket lien on residential mortgages and other real estate secured loans. Total loans pledged as collateral at the FHLB were $2.0$2.3 billion at year end.end 2014. The FHLB has eliminated the requirement that it may require collateral delivery for any portion of credit exposure that exceeds 70 percent of maximum borrowing capacity. We were eligible to borrow up to an additional $714.1 million$1.3 billion based on qualifying collateral, and up to $277.1 million more provided that additional collateral is pledged.

Interest expensea maximum borrowing capacity of $1.1 million, $1.6 million and $5.6 million was recognized onbillion.

The following table represents the balance of long-term borrowings, the weighted average interest rate as of December 31 and interest expense for 2011, 2010 and 2009, respectively. the years ended December 31:
(dollars in thousand)201420132012
Long-term borrowings$19,442
$21,810
$34,101
Weighted average interest rate3.00%3.01%3.17%
Interest expense$617
$746
$1,107
Scheduled annual maturities and average interest raterates for all of theour long-term debt, including a capital lease of $0.3$0.2 million, for each of the five years and thereafter subsequent to December 31, 20112014 are as follows:

    Balance   Average Rate 
(in thousands)        

2012

  $1,818     3.63%  

2013

   11,885     3.52%  

2014

   1,956     3.73%  

2015

   1,981     3.79%  

2016

   1,905     3.84%  

Thereafter

   12,329     3.07%  

Total

  $31,874     3.40%  


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NOTE 15. LONG-TERM BORROWINGS AND SUBORDINATED DEBT -- continued


(dollars in thousands)Balance
Average Rate
2015$2,399
3.41%
20162,330
3.44%
20172,412
3.53%
20182,496
3.67%
20192,514
3.13%
Thereafter7,291
2.20%
Total$19,442
2.97%
Junior Subordinated Debt Securities

The following table represents the composition of junior subordinated debt securities at December 31 and the interest expense for the years ended December 31:

    2011   2010   2009 
  Balance   Interest
Expense		   Balance   Interest
Expense		   Balance   Interest
Expense		 
(in thousands)                        

2006 Junior subordinated debt

  $25,000    $1,344    $25,000    $1,695    $25,000    $1,695  

2008 Junior subordinated debt—trust preferred securities

   20,619     777     20,619     782     20,619     912  

2008 Junior subordinated debt

   20,000     786     20,000     791     20,000     919  

2008 Junior subordinated debt

   25,000     728     25,000     735     25,000     887  

Total

  $90,619    $3,635    $90,619    $4,003    $90,619    $4,413  

PAGE 106

 2014 2013 2012
(dollars in thousands)Balance
Interest
Expense

 Balance
Interest
Expense

 Balance
Interest
Expense

2006 Junior subordinated debt$25,000
$463
 $25,000
$475
 $25,000
$523
2008 Junior subordinated debt—trust preferred securities20,619
759
 20,619
770
 20,619
808
2008 Junior subordinated debt—
—
 —
422
 20,000
818
2008 Junior subordinated debt—
—
 —
403
 25,000
766
Total$45,619
$1,222
 $45,619
$2,070
 $90,619
$2,915
NOTE 15. LONG-TERM BORROWINGS — continued

The following table summarizes the key terms of our junior subordinated debt securities:

   

2006 Junior

Subordinated Debt

 

2008 Trust

Preferred Securities

 

2008 Junior

Subordinated Debt

 

2008 Junior

Subordinated Debt

(in thousands)        

Junior Subordinated Debt

 $25,000 — $20,000 $25,000

Trust Preferred Securities

 — $20,000 — —

Stated Maturity Date

 12/15/2036 3/15/2038 6/15/2018 5/30/2018

First optional redemption date at par

 9/15/2011 3/15/2013 6/15/2013 5/30/2013

Regulatory Capital

 Tier 2 Tier 1 Tier 2 Tier 2

Interest Rate

 3 month LIBOR*
plus 160 bps		 3 month LIBOR
plus 350 bps		 3 month LIBOR
plus 350 bps		 3 month LIBOR
plus 250 bps

Interest Rate at December 31, 2011

 2.15% 4.05% 4.05% 3.02%

(dollars in thousands)
2006 Junior
Subordinated Debt
2008 Trust
Preferred Securities
2008 Junior
Subordinated Debt
2008 Junior
Subordinated Debt
Junior Subordinated Debt$25,000—$20,000$25,000
Trust Preferred Securities—$20,619——
Stated Maturity Date12/15/20363/15/20386/15/20185/30/2018
Optional redemption date at parAny time after 9/15/2011Any time after 3/15/2013Any time after 6/15/2013Any time after 5/30/2013
Regulatory CapitalTier 2Tier 1Tier 2Tier 2
Interest Rate3 month LIBOR plus 160 bps3 month LIBOR plus 350 bps3 month LIBOR plus 350 bps3 month LIBOR plus 250 bps
Interest Rate at December 31, 20141.84%3.74%—%—%
We completed a private placement of the trust preferred securities to a financial institution during the first quarter of 2008. As a result, we own 100 percent of the common equity withinof STBA Capital Trust I. The trust was formed to issue mandatorily redeemable capital securities to third-party investors. The proceeds from the sale of the securities and the issuance of the common equity by STBA Capital Trust I were invested in junior subordinated debt securities issued by us. The third party investors are considered the primary beneficiaries; therefore, the trust qualifies as a variable interest entity, or VIE, but areis not consolidated into our financial statements. STBA Capital Trust I pays dividends on the securities at the same rate as the distributionsinterest paid by us on the junior subordinated debt held by STBA Capital Trust I.

We repaid $45.0 million of junior subordinated debt in June 2013 because of its diminishing regulatory capital benefit and the future positive impact on net interest income. We replaced the funding primarily with FHLB short-term advances.


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NOTE 16. COMMITMENTS AND CONTINGENCIES

Commitments

The following table sets forth theour commitments and letters of credit at December 31:

    2011   2010 
(in thousands)        

Commitments to extend credit

  $816,160    $836,042  

Standby letters of credit

   119,576     135,489  

Total

  $935,736    $971,531  

as of the dates presented:

 December 31,
(dollars in thousands)2014
2013
Commitments to extend credit$1,158,628
$1,038,529
Standby letters of credit73,584
78,639
Total$1,232,212
$1,117,168
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.

Our allowance for unfunded loan commitments totaled $1.2$2.3 million at December 31, 20112014 and $2.7$2.9 million at December 31, 2010. Refer to Note 1 Summary of Significant Accounting Policies, Allowance for Unfunded Commitments for the methodology used to calculate the allowance for unfunded commitments.

2013.

We have future commitments with third party vendors for data processing and communication charges. DataWe had data processing and communication charges related to these commitments resulted in expense of $7.4$9.8 million $6.8, $9.5 million and $6.7$10.3 million for 2014, 2013 and 2012. Included in the 2013 expense is $0.8 million in 2011, 2010 and 2009, respectively.

PAGE 107

NOTE 16. COMMITMENTS AND CONTINGENCIES — continued

one-time merger related expense.

The following table sets forth the future estimated payments related to data processing and communication charges for each of the periods stated:

    Total 
(in thousands)    

2012

  $9,124  

2013

   6,339  

2014

   6,523  

2015

   6,671  

2016

   6,317  

Total

  $34,974  

The commitments in the above table show a decrease in 2013 due to the expiration of a contract with both a third party data processor and a communication vendor. We will be negotiating new contracts during 2012 with these vendors. Additionally, the 2012 commitments include $2.0 million in data processing costs associated with our upcoming acquisition of Mainline.

five years following December 31, 2014:

(dollars in thousands)Total
  
2015$11,326
201610,715
201711,057
201811,411
201911,777
Total$56,286
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.

position or results of operations.


NOTE 17. INCOME TAXES

Income tax expense (benefit) for the years ended December 31 are comprised of:

    2011   2010  2009 
(in thousands)           

Current

  $12,174    $18,969   $3,596  

Deferred

   2,448     (4,537)   (7,465) 

Total

  $14,622    $14,432   $(3,869) 

(dollars in thousands)2014
2013
2012
Current$15,979
$16,836
$6,223
Deferred1,536
(2,358)1,038
Total$17,515
$14,478
$7,261
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. We ordinarily generate an annual effective tax rate that is less thatthan the statutory rate of 35 percent primarily due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt interestincome on BOLI and tax benefits associated with LIHTC from certain partnership investments.


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NOTE 17. INCOME TAXES -- continued

The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:

    2011   2010   2009 

Statutory tax rate

   35.0 %     35.0 %     35.0 %  

Low income housing and federal historic tax credits

   (5.5)%     (3.9)%     (36.5)%  

Tax-exempt interest

   (4.1)%     (4.8)%     (74.2)%  

Bank owned life insurance

   (1.2)%     (1.3)%     (15.6)%  

Dividend exclusion

   (0.6)%     (0.7)%     (14.4)%  

Adjustment of deferred balances

   —     —     6.3 %  

Other

   —     0.6 %     4.7 %  

Effective Tax Rate

   23.6 %     24.9 %     (94.7)%  

PAGE 108

 2014
2013
2012
Statutory tax rate35.0 %35.0 %35.0 %
Low income housing tax credits(5.8)%(6.8)%(10.5)%
Tax-exempt interest(4.6)%(4.5)%(6.7)%
Bank owned life insurance(0.8)%(1.0)%(1.2)%
Other(0.6)%(0.4)%0.9 %
Effective Tax Rate23.2 %22.3 %17.5 %
NOTE 17. INCOME TAXES — continued

Income taxes applicable to security gains (losses) insignificant in 2011, $0.1 million in 2010 and $(1.8) million in 2009.

Significant components of our temporary differences were as follows at December 31:

    2011  2010 
(in thousands)       

Deferred Tax Liabilities:

   

Net unrealized holding gains on securities available-for-sale

  $5,208   $2,818  

Prepaid pension

   5,007    3,930  

Deferred loan income

   736    599  

Purchase accounting adjustments

   3,160    3,959  

Depreciation on premises and equipment

   1,882    2,001  

Other

   701    649  

Total Deferred Tax liabilities

   16,694    13,956  

Deferred Tax Assets:

   

Allowance for loan losses

   15,593    17,644  

Loan fees

   250    341  

Other employee benefits

   2,148    2,024  

Low income housing partnerships

   2,608    2,281  

Net adjustment to funded status of pension

   12,804    6,228  

Impairment of securities

   2,119    2,130  

Delinquent interest on nonaccrual loans

   1,187    1,939  

State net operating loss carryforwards

   1,232    971  

Other

   3,309    2,955  

Gross Deferred Tax Assets

   41,250    36,513  

Less: Valuation allowance for Pennsylvania net operating loss carryforwards

   (1,232)   (971) 

Total Deferred Tax Assets

   40,018    35,542  

Net Deferred Tax Asset

  $23,324   $21,586  

(dollars in thousands)2014
2013
Deferred Tax Liabilities:  
Net unrealized holding gains on securities available-for-sale$(3,783)$—
Prepaid pension(3,472)(3,730)
Deferred loan income(2,165)(1,614)
Purchase accounting adjustments(631)(801)
Depreciation on premises and equipment(1,590)(1,061)
Other(812)(823)
Total Deferred Tax liabilities(12,453)(8,029)
Deferred Tax Assets:  
Net unrealized holding losses on securities available-for-sale—
361
Allowance for loan losses17,567
18,890
Other employee benefits2,453
2,369
Low income housing partnerships4,049
3,147
Net adjustment to funded status of pension11,089
6,495
Impairment of securities1,313
1,313
Delinquent interest on nonaccrual loans—
1,626
State net operating loss carryforwards2,249
1,828
Other4,668
3,950
Gross Deferred Tax Assets43,388
39,979
Less: Valuation allowance(2,249)(2,199)
Total Deferred Tax Assets41,139
37,780
Net Deferred Tax Asset$28,686
$29,751
We establish a valuation allowance when it is more likely than not that we will not be able to realize the benefit of the deferred tax assets. Except for Pennsylvania net operating loss,losses, or NOL, carryforwards,NOLs, we have determined that a valuation allowance is unnecessary for the deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and through future taxable income. Periodically, theThe valuation allowance is reviewed quarterly and adjusted based on management’s assessments of realizable deferred tax assets. Gross deferred tax assets were reduced by a valuation allowance of $2.2 million in 2014 related to Pennsylvania income tax net operating losses generated by the bank holding company, as utilization of these losses is not likely. These operating lossNOLs. The PA NOL carryforwards total $12.3$22.5 million and will expire in the years 2021-2031.

PAGE 109

2020-2034.


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NOTE 17. INCOME TAXES —-- continued

The period change in deferred taxes on our balance sheet is comprised of the following at December 31:

    2011  2010 
(in thousands)       

Deferred tax changes reflected in other comprehensive gain/loss

  $(4,186)  $(65) 

Deferred tax changes reflected in federal income tax expense (benefit)

   2,448    (4,537) 


Unrecognized Tax Benefits

A reconciliation of the change in Federal and State gross unrecognized tax benefits, or UTB, for the years ended December 31:

    2011  2010  2009 
(in thousands)          

Balance at beginning of year

  $242   $286   $195  

Prior period tax positions

    

Increase

   —    —    —  

Decrease

   —    (67)   (79) 

Current period tax positions

   (42)   23    170  

Reductions for statute of limitations expirations

   —    —    —  

Balance at End of Year

  $200   $242   $286  

Amount That Would Affect the Effective Tax Rate if Recognized

  $197   $239   $249  

(dollars in thousands)201420132012
Balance at beginning of year$1,902
$978
$200
Prior period tax positions   
Increase55
924
—
Decrease(1,673)—
—
Current period tax positions—
—
913
Reductions for statute of limitations expirations—
—
(135)
Balance at End of Year$284
$1,902
$978
Amount That Would Affect the Effective Tax Rate if Recognized$184
$148
$147
We classify interest and penalties as an element of tax expense. The amount of tax-related interest and penalties recognized in the Consolidated Statements of Income for years 2011, 2010 and 2009 and the total of such amounts accrued in the Consolidated Balance Sheets at December 31, 2011 and 2010 were not material.

We monitor changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. In 2014, we reduced our reserve for tax and interest by $1.7 million to eliminate our UTB relating to Bad Debts that existed at December 31, 2013. Upon review of Large Business & International Directive 04-1014-008 issued October 24, 2014, we determined it is more likely than not upon examination our filing position, for which we previously maintained a reserve for UTB, would be upheld. As of December 31, 20112014, no other significant changes to UTB are projected, however, tax audit examinations are possible.

We recognized $0.1 million related to interest in 2014, $0.2 million related to interest in 2013 and 2012 in the Consolidated Statements of Net Income.
During 2013, the IRS completed its examination of our 2010 tax year. The examination was closed with no material adjustments impacting tax expense. As of December 31, 2014, all income tax returns filed for the tax years 2011 through 2013 remain subject to examination by the IRS.

NOTE 18. TAX EFFECTS ON OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the tax effects of the components of other comprehensive income (loss) for the years ended December 31:
(dollars in thousands)
Pre-Tax
Amount

Tax
(Expense)
Benefit

Net of Tax
Amount

2014   
Net change in unrealized gains on securities available-for-sale$11,825
$(4,139)$7,686
Net available-for-sale securities gains reclassified into earnings(41)15
(26)
Adjustment to funded status of employee benefit plans(13,394)4,595
(8,799)
Other Comprehensive Income/(Loss)$(1,610)$471
$(1,139)
2013   
Net change in unrealized losses on securities available-for-sale$(16,928)$5,925
$(11,003)
Net available-for-sale securities gains reclassified into earnings(5)2
(3)
Adjustment to funded status of employee benefit plans18,299
(6,405)11,894
Other Comprehensive Income$1,366
$(478)$888
2012   
Net change in unrealized gains on securities available-for-sale$4,097
$(1,434)$2,663
Net available-for-sale securities gains reclassified into earnings(3,016)1,055
(1,961)
Adjustment to funded status of employee benefit plans(271)95
(176)
Other Comprehensive Income$810
$(284)$526


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NOTE 18.19. EMPLOYEE BENEFITS

We maintain a defined benefit pension plan, or Plan, covering substantially all employees hired prior to January 1, 2008. The benefits are based on years of service and the employee’s compensation for the highest five consecutive years in the last ten10 years. Contributions are intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future.

PAGE 110

NOTE 18. EMPLOYEE BENEFITS — continued

The following table summarizes the activity in the benefit obligation and Plan assets deriving the funded status, which is recorded in other liabilities in the Consolidated Balance Sheets:

    2011  2010 
(in thousands)       

Change in Projected Benefit Obligation

   

Projected benefit obligation at beginning of year

  $74,118   $65,183  

Service cost

   2,371    2,245  

Interest cost

   4,162    4,017  

Plan participants’ contributions

   3,964    162  

Plan amendments

   (1,513)   —  

Actuarial loss

   15,199    5,373  

Benefits paid

   (5,268)   (2,862) 

Projected Benefit Obligation at End of Year

  $93,033   $74,118  

Change in Plan Assets

   

Fair value of plan assets at beginning of year

  $68,774   $62,480  

Actual return on plan assets

   156    8,994  

Employer contributions

   5,000    —  

Plan participants’ contributions

   3,964    162  

Benefits paid

   (5,268)   (2,862) 

Fair Value of Plan Assets at End of Year

  $72,626   $68,774  

Funded Status

  $(20,407)  $(5,344) 

(dollars in thousands)2014
2013
Change in Projected Benefit Obligation  
Projected benefit obligation at beginning of year$95,969
$102,454
Service cost2,369
2,767
Interest cost4,470
3,985
Actuarial loss (gain)16,020
(7,167)
Benefits paid(5,704)(6,070)
Projected Benefit Obligation at End of Year$113,124
$95,969
Change in Plan Assets  
Fair value of plan assets at beginning of year$89,556
$81,088
Actual return on plan assets9,634
14,538
Benefits paid(5,704)(6,070)
Fair Value of Plan Assets at End of Year$93,486
$89,556
Funded Status$(19,638)$(6,413)
The following table sets forth the amounts recognized in accumulated other comprehensive gain/lossincome (loss) at December 31:

    2011  2010 
(in thousands)       

Prior service credit

  $(1,579)  $(73) 

Net actuarial loss

   36,294    16,645  

Total (Before Tax Effects)

  $34,715   $16,572  

(dollars in thousands)2014
2013
Prior service credit$(1,167)$(1,304)
Net actuarial loss30,726
18,373
Total (Before Tax Effects)$29,559
$17,069
Below are the actuarial weighted average assumptions used in determining the benefit obligation:

    2011  2010 

Discount rate

   4.75%   5.75% 

Rate of compensation increase

   4.00%   4.00% 

PAGE 111

 2014
2013
Discount rate4.00%4.75%
Rate of compensation increase3.00%3.00%

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NOTE 18.19. EMPLOYEE BENEFITS —-- continued



The following table summarizes the components of net periodic pension cost and other changes in planPlan assets and benefit obligation recognized in other comprehensive gain/lossincome (loss) for the years ended December 31:

    2011  2010  2009 
(in thousands)          

Components of Net Periodic Pension Cost

    

Service cost—benefits earned during the period

  $2,371   $2,245   $2,311  

Interest cost on projected benefit obligation

   4,162    4,017    3,797  

Expected return on plan assets

   (5,378)   (4,882)   (4,288) 

Amortization of prior service credit

   (7)   (7)   (7) 

Recognized net actuarial loss

   773    824    1,297  

Net Periodic Pension Cost

  $1,921   $2,197   $3,110  

Other Changes in Plan Assets and Benefit Obligation Recognized in Other Comprehensive Loss

    

Net actuarial loss (gain)

  $20,422   $1,261   $(6,211) 

Recognized net actuarial loss

   (773)   (824)   (1,297) 

Prior service credit

   (1,513)   —    —  

Recognized prior service credit

   7    7    7  

Total (Before Tax Effects)

  $18,143   $444   $(7,501) 

Total Recognized in Net Benefit Cost and Other Comprehensive Gain/Loss (Before Tax Effects)

  $20,064   $2,641   $(4,391) 

(dollars in thousands)2014
2013
2012
Components of Net Periodic Pension Cost   
Service cost—benefits earned during the period$2,369
$2,767
$2,788
Interest cost on projected benefit obligation4,470
3,985
4,358
Expected return on plan assets(6,907)(6,207)(5,564)
Amortization of prior service cost (credit)(137)(138)(137)
Recognized net actuarial loss941
2,425
2,474
Net Periodic Pension Expense$736
$2,832
$3,919
Other Changes in Plan Assets and Benefit Obligation Recognized in Other Comprehensive Income (Loss)   
Net actuarial loss (gain)$13,294
$(15,499)$2,477
Recognized net actuarial loss(941)(2,425)(2,474)
Recognized prior service credit137
138
137
Total (Before Tax Effects)$12,490
$(17,786)$140
Total Recognized in Net Benefit Cost and Other Comprehensive Income (Loss) (Before Tax Effects)$13,226
$(14,954)$4,059
The following table summarizes the actuarial weighted average assumptions used in determining net periodic pension cost:

    2011   2010   2009 

Discount rate

   5.75%     6.25%     6.25%  

Rate of compensation increase

   4.00%     4.00%     4.00%  

Expected return on assets

   8.00%     8.00%     8.00%  

 2014
2013
2012
Discount rate4.75%4.00%4.75%
Rate of compensation increase3.00%3.00%4.00%
Expected return on assets8.00%8.00%8.00%
The net actuarial loss included in accumulated other comprehensive gain/lossincome (loss) expected to be recognized in net periodic pension cost during the year ended December 31, 20122015 is $2.3$1.9 million. The prior service costcredit expected to be recognized during the same period is not significant.

$0.1 million.

The accumulated benefit obligation for the Plan was $82.0$104.3 million at December 31, 20112014 and $65.7$88.3 million at December 31, 2010.

2013.

We consider many factors when setting the assumed rate of return on Plan assets. As a general guideline the assumed rate of return is equal to the weighted average of the expected returns for each asset category and is estimated based on historical returns as well as expected future returns. The weighted average discount rate is derived from corporate yield curves.

S&T Bank’s Retirement Plan Committee determines the investment policy for the Plan. In general, the targeted asset allocation is 50 percent to 70 percent equities and 30 percent to 50 percent fixed income. A strategic allocation within each asset class is employed based on the Plan’s time horizon, risk tolerances, performance expectations and asset class preferences. Investment managers have discretion to invest in any equity or fixed-income asset class, subject to the securities guidelines of the Plan’s Investment Policy Statement.

PAGE 112

NOTE 18. EMPLOYEE BENEFITS — continued

At this time, theS&T Bank is not required to make a cash contribution to the Plan in 2012; however, the Bank contributed $5.0 million to the Plan in December 2011.

2015. No contributions were made during 2014.


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NOTE 19. EMPLOYEE BENEFITS -- continued


The following table provides information regarding estimated future benefit payments to be paid in each of the next five years and in the aggregate for the five years thereafter:

    Amount 
(in thousands)    

2012

  $4,905  

2013

   5,324  

2014

   5,346  

2015

   6,681  

2016

   5,749  

2017—2021

   32,761  

(dollars in thousands)Amount
  
2015$6,440
20166,437
20176,268
20186,719
20196,637
2020 - 202438,984
We also have supplemental executive retirement plans, or SERPs, for certain key employees. The SERPs are unfunded. The projected benefit obligations related to the SERPs were $3.1$3.5 million and $2.3$2.8 million at December 31, 20112014 and 2010, respectively.2013. These amounts also represent the net amount recognized in the statement of financial position for the SERPs. Net periodic benefit costs for the SERPs were $0.3$0.4 million, $0.4 million and $0.5 million for each of the years ended December 31, 2011, 20102014, 2013 and 2009, respectively.2012. Additionally, $1.9$2.1 million and $1.3$1.5 million before tax were reflected in accumulated other comprehensive gain/lossincome (loss) at December 31, 20112014 and 2010, respectively,2013, in relation to the SERPs. The actuarial assumptions used for the SERPs are the same as those used for the Plan.

We maintain a Thrift Plan, a qualified defined contribution plan, in which substantially all employees are eligible to participate. We make matching contributions to the Thrift Plan up to 3.5 percent of participants’ eligible compensation and may make additional profit-sharing contributions as provided by the Thrift Plan. Expense related to these contributions amounted to $1.1$1.3 million in both 2011 and 2010 and2014, $1.4 million in 2009.

2013 and $1.3 million in 2012.

Fair Value Measurements

The following tables present our pension planPlan assets measured at fair value on a recurring basis by fair value hierarchy level at December 31, 20112014 and 2010.2013. There were no transfers between Level 1 and Level 2 for items of a recurring basis during the periods presented.

   December 31, 2011 
Asset Class(1)  Level 1   Level 2   Level 3   Total 
(in thousands)                

Cash and cash equivalents(2)

  $—    $7,440    $—    $7,440  

Fixed Income(3)

   21,539     —     1,333     22,872  

Equities:

        

Equity index mutual funds—domestic(4)

   1,580     —     —     1,580  

Equity index mutual funds—international(5)

   3,437     —     —     3,437  

Domestic Individual Equities(6)

   34,600     —     —     34,600  

International Individual Equities(7)

   1,437     —     —     1,437  

Equity—Partnerships(8)

   —     —     1,260     1,260  
Total Assets at Fair Value  $62,593    $7,440    $2,593    $72,626  
 There were no purchases or transfers of Level 3 plan assets in 2014.
 December 31, 2014
 
Fair Value Asset Classes(1)
(dollars in thousands)Level 1
Level 2
Level 3
Total
Cash and cash equivalents(2)
$—
$5,073
$—
$5,073
Fixed Income(3)
26,726
—
—
26,726
Equities:    
Equity index mutual funds—international(4)
3,728
—
—
3,728
Domestic Individual Equities(5)
57,085
—
—
57,085
International Individual Equities(6)
874
—
—
874
Total Assets at Fair Value$88,413
$5,073
$—
$93,486
(1)

(1)Refer to Note 1 Summary of Significant Accounting Policies, Fair Value Measurements for a description of levels within the fair value hierarchy.

(2)

(2)This asset class includes FDIC insured money market instruments.

PAGE 113

NOTE 18. EMPLOYEE BENEFITS — continued

(3)

This asset class includes a variety of fixed income mutual funds and a partnership which primarily invests in investment grade rated securities. Investment managers have discretion to invest in fixed income related securities including futures, options and other derivatives. Investments may be made in currencies other than the U.S. dollar.

(4)

The sole investment within this asset class is S&P 600 index iShares.

(5)(3)

The sole investment within this asset class is MSCI EAFE Index iShares.

(6)

This asset class includes individual domestic equities invested in an active all-cap strategy. It may also include convertible bonds.

(7)

This asset class includes American Depository Receipts, or ADR.

(8)

This asset class includes a Partnership priced by the investment manager which invests in equities and T-Bills.

   December 31, 2010 
Asset Class(1)  Level 1   Level 2   Level 3   Total 
(in thousands)                

Cash and cash equivalents(2)

  $—    $3,196    $—    $3,196  

Fixed Income(3)

   24,302     —     —     24,302  

Equities:

        

Equity index mutual funds—domestic(4)

   1,477     —     —     1,477  

Equity index mutual funds—international(5)

   3,643     —     —     3,643  

Domestic Individual Equities(6)

   34,621     —     —     34,621  

International Individual Equities(7)

   1,535     —     —     1,535  
Total Assets at Fair Value  $65,578    $3,196    $—    $68,774  
(1)

Refer to Note 1 Summary of Significant Accounting Policies, Fair Value Measurements for a description of levels within the fair value hierarchy.

(2)

This asset class includes FDIC insured money market instruments.

(3)

This asset class includes a variety of fixed income mutual funds which primarily invests in investment grade rated securities. Investment managers have discretion to invest in fixed income related securities including futures, options and other derivatives. Investments may be made in currencies other than the U.S. dollar.

(4)

(4)The sole investment within this asset class is S&P 600 index iShares.

the Harbor International Institutional fund.
(5)

The sole investment within this asset class is MSCI EAFE Index iShares.

(6)(5)

This asset class includes individual domestic equities invested in an active all-cap strategy. It may also include convertible bonds.

(7)

(6)This asset class includes American Depository Receipts, or ADR.


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NOTE 19. EMPLOYEE BENEFITS -- continued


 December 31, 2013
 
Fair Value Asset Classes(1)
(dollars in thousands)Level 1
Level 2
Level 3
Total
Cash and cash equivalents(2)
$—
$2,946
$—
$2,946
Fixed Income(3)
26,448
—
—
26,448
Equities:    
Equity index mutual funds—domestic(4)
1,558
—
—
1,558
Equity index mutual funds—international(5)
2,497
—
—
2,497
Domestic Individual Equities(6)
55,206
—
—
55,206
International Individual Equities(7)
901
—
—
901
Total Assets at Fair Value$86,610
$2,946
$—
$89,556
(1)Refer to Note 1 Summary of Significant Accounting Policies, Fair Value Measurements for a description of levels within the fair value hierarchy.
(2)This asset class includes FDIC insured money market instruments.
(3)This asset class includes a variety of fixed income mutual funds which primarily invests in investment grade rated securities. Investment managers have discretion to invest in fixed income related securities including futures, options and other derivatives. Investments may be made in currencies other than the U.S. dollar.
(4)The sole investment within this asset class is S&P 600 index iShares.
(5)The sole investment within this asset class is MSCI EAFE Index iShares.
(6)This asset class includes individual domestic equities invested in an active all-cap strategy. It may also include convertible bonds.
(7)This asset class includes American Depository Receipts, or ADR.

NOTE 19.20. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN

We adopted an Incentive Stock Plan in 1992 that provided for granting incentive stock options, nonstatutory stock options, restricted stock and appreciation rights. On October 17, 1994, the 1992 Stock Plan was amended to include outside directors. The 1992 Stock Plan had a maximum of 3,200,000 shares of our common stock and expired ten years from the date of board approval. At December 31, 2002, 3,180,822 nonstatutory stock options and restricted stock had been granted under the 1992 Stock Plan. No further awards will be made under the 1992 Stock Plan.

All grants under the 1992 Stock Plan have expired at December 31, 2012.

We adopted an incentiveIncentive Stock Plan in 2003 that provides for granting incentive stock options, nonstatutory stock options, restricted stock and appreciation rights. The 2003 Stock Plan has a maximum of 1,500,000 shares of our common stock and expires ten years from the date of board approval. The 2003 Stock Plan is similar to the 1992 Stock Plan, which the 2003 Stock Plan replaced.

No further awards will be granted under the 2003 Stock Plan.

We adopted an Incentive Stock Plan in 2014 that provides for cash performance awards and for granting incentive stock options, nonstatutory stock options, restricted stock, restricted stock units and appreciation rights. The 2014 Incentive Plan has a maximum of 750,000 shares of our common stock and expires ten years from the date of board approval. With respect to stock compensation provisions, the 2014 Incentive Plan is similar to the 2003 Stock Plan, which the 2014 Stock Plan replaced.
Stock Options

As of December 31, 2011, 757,0502014, 155,500 nonstatutory stock options are outstanding under the 2003 Stock Plan. Nonstatutory stock options granted in 2006 and 2005 are fully vested and have a ten-yearten year life. Our policy is to issue shares from treasury upon exercise of stock options. We did not recognize compensation expense forThese stock options were fully expensed in 2011 or 2010. We recognized $0.5 million, net of tax was $0.3 million, for year ending December 31, 2009.

PAGE 114

NOTE 19. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN — continued

The fair value of nonstatutory stock option awards under the nonstatutory stock option plan is2003 Stock Plan were estimated on the date of grant using the Black-Scholes valuation model, which is dependent upon certain assumptions. We use the simplified method in developing the estimated life of the option, whereby the expected life is presumed to be the mid pointmidpoint between the vesting date and the end of the contractual term. There werehave been no nonstatutory stock options granted in 2011, 2010 or 2009.

since 2006.


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NOTE 20. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN -- continued

The following table summarizes activity for nonstatutory stock options for the years endingended December 31:

   2011  2010  2009 
 Number
of Shares		  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term		  Number of
Shares		  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term		  Number of
Shares		  Weighted
Average
Exercise
Price		  Weighted
Average
Remaining
Contractual
Term		 

Outstanding at Beginning of Year

  930,700   $32.80     1,100,550   $31.85     1,199,650   $31.14   

Granted

  —    —     —    —     —    —   

Exercised

  —    —     (82,100)   19.81     (1,150)   23.80   

Forfeited

  (173,650)   26.11        (87,750)   33.04        (97,950)   23.28      

Outstanding at End of Year

  757,050   $34.33    2.8 years    930,700   $32.80    3.3 years    1,100,550   $31.85    4.1 years  

Exercisable at End of Year

  757,050   $34.33    2.8 years    930,700   $32.80    3.3 years    1,048,925   $31.55    4.0 years  

 2014 2013 2012
 
Number
of Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term
 
Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term
 
Number of
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term
Outstanding at beginning of year428,900
$37.36
  675,500
$35.18
  757,050
$34.33
 
Granted—
—
  —
—
  —
—
 
Exercised—
—
  —
—
  —
—
 
Forfeited(273,400)37.08
  (246,600)31.39
  (81,550)27.29
 
Outstanding at End of Year155,500
$37.86
1.0 year 428,900
$37.36
1.4 years 675,500
$35.18
2.0 years
Exercisable at End of Year155,500
$37.86
1.0 year 428,900
$37.36
1.4 years 675,500
$35.18
2.0 years
The aggregate intrinsic value of options outstanding and exercisable was zero as of December 31, 2011, 20102014, 2013 and 2009.2012. The aggregate intrinsic value represents the total pretax intrinsic value (the difference between our closing stock price on the last trading day of the fourth quarter and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011.

The following table provides information about non-vested2014.

As of December 31, 2014, 2013 and 2012 all outstanding stock options forhave vested. During the years ended December 31:

    Non-Vested
Options		   Weighted Average
Grant Date
Fair Value		 

Non-vested at December 31, 2008

   103,250    $9.48  

Granted

   —     —  

Vested

   51,625     9.48  

Forfeited

   —     —  

Non-vested at December 31, 2009

   51,625    $9.48  

Granted

   —     —  

Vested

   30,625     9.48  

Forfeited

   21,000     9.48  

Non-vested at December 31, 2010

   —    $—  

Granted

   —     —  

Vested

   —     —  

Forfeited

   —     —  

Non-vested at December 31, 2011

   —    $—  

PAGE 115

NOTE 19. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN — continued

The following table presents information about31, 2014, 2013 and 2012 no stock options exercised for the years ended December 31:

    2011   2010   2009 
(in thousands, except share data)            

Number of options exercised

   —     82,100     1,150  

Total intrinsic value of options exercised

  $—    $131    $13  

Cash received from options exercised

   —     1,758     40  

Tax deduction realized from options exercised

  $—    $46    $4  

were exercised.

Restricted Stock

We periodically issue restricted stock to employees and directors, pursuant to the 2003our Stock Plan.Plans. As of December 31, 2011, 170,1142014, 259,673 restricted shares have been granted under this plan.

the 2003 Stock Plan and 80,455 restricted shares have been granted under the 2014 Stock Plan.

During 2011, 20102014, 2013 and 2009,2012, we granted 19,890, 14,20813,824, 18,942 and 17,20019,362 restricted shares of common stock, respectively, to outside directors. The 2014 grants were issued under the 2014 Stock Plan and the 2013 and 2012 grants were issued under the 2003 Stock Plan. The grants are part of the compensation arrangement approved by the Compensation and Benefits Committee whereaswhereby the directors receive compensation in both the form of cash and restricted shares of common stock. These shares fully vest one year after the date of grant.

Also during 20112014, 2013 and 2010,2012, we granted 60,15766,631, 3,247 and 4,68848,008 restricted shares of common stock respectively, to senior management. No restricted sharesThe 2014 grants were granted in 2009.issued under the 2014 Stock Plan and the 2013 and 2012 grants were issued under the 2003 Stock Plan. The awards to senior management were granted in accordance with performance levels set by the Compensation and Benefits Committee. TheDuring 2013 and 2012 restricted shares were granted during 2011 occurred on threetwo occasions and have different vesting periods. The first grant, or 16,497 restricted stock grants for 2013 of 3,247 shares vestsand for 2012 of 9,897 shares vest fully on the second anniversary of the grant date.dates. The second grant, or 11,104 restricted shares vests fully on January 1, 2012. The third grant, or 32,556 restricted shares, was granted under our Long Term Incentive Plan, or LTIP, for 2014 and consists2012 of 66,631 and 38,111 shares, respectively consisted of both time and performance-based awards. The 2014 grants were issued under the 2014 Stock Plan and there were no shares granted under the 2003 Stock Plan in 2013. Vesting for the time-based awards is 50 percent after two years and the remaining 50 percent at the end of the third year. The performance-based awards vest fully at the end of the three year period. Of the 4,688 restricted shares granted in 2010, 1,881 shares fully vested one year after the date of grant. The remaining 2,807 shares granted vest 50 percent on each of the one and two year anniversaries from the date of grant. The shares granted prior to 2009 vest 25 percent per year over a four year vesting period beginning on January 1 one year after the shares were granted.

During the vesting period, the recipient receives dividends and has the right to vote on the unvested shares granted.granted, except for the 2014 LTIP performance-based award. If the recipient leaves S&T before the end of the vesting period, shares will be forfeited except in the case of retirement, disability or death where accelerated vesting provisionprovisions are defined within the planawards agreement.

Compensation expense for time-based restricted stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the date of grant. For grants made to directors, the fair value is determined by the closing price of the stock on the date of grant. The average of the high and low prices of the stock on the grant date is used for senior management. Compensation expense for performance-based restricted stock is recognized ratably over the remaining vesting period once the likelihood of meeting the performance measure is probable. During 2011, 20102014, 2013 and 2009,2012, we recognized compensation expense of $1.1$0.9 million, $0.5$0.6 million and $0.5$0.9 million and realized a tax benefit of $0.4 million, $0.3 million, and $0.2 million respectively.

PAGE 116

and $0.3 million related to restricted stock grants.


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NOTE 19.20. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN —-- continued


The following table provides information about restricted stock granted under the 2003 Stock Plan for the years ended December 31:

    Restricted
Stock		   Weighted Average
Grant Date Fair
Value		 

Non-vested at December 31, 2008

   38,891    $29.88  

Granted

   17,200     18.61  

Vested

   14,749     31.13  

Forfeited

   —     —  

Non-vested at December 31, 2009

   41,342    $24.75  

Granted

   18,896     21.44  

Vested

   25,006     21.86  

Forfeited

   3,562     29.15  

Non-vested at December 31, 2010

   31,670    $24.56  

Granted

   80,047     21.39  

Vested

   23,915     23.69  

Forfeited

   1,652     23.64  

Non-vested at December 31, 2011

   86,150    $21.88  

 
Restricted
Stock

 
Weighted Average
Grant Date
Fair Value

Non-vested at December 31, 2012115,019
 $22.39
Granted22,189
 19.18
Vested45,864
 19.68
Forfeited11,929
 21.30
Non-vested at December 31, 201379,415
 $21.50
Granted—
 —
Vested41,740
 20.70
Forfeited14,530
 20.97
Non-vested at December 31, 201423,145
 $23.28
The following table provides information about restricted stock granted under the 2014 Stock Plan for the years ended December 31:
 
Restricted
Stock

 
Weighted Average
Grant Date
Fair Value

Non-vested at December 31, 2013—
 $—
Granted80,455
 23.24
Vested158
 23.19
Forfeited473
 23.19
Non-vested at December 31, 201479,824
 $23.24
As of December 31, 2011,2014, there was $0.8$1.5 million of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of one year.

Cash Appreciation Rights

We also sponsor a Cash Appreciation Rights, or CARs, plan which is accounted for as a liability instrument and required to be marked to market each reporting period. The CARs are settled in cash. There were no CARs granted for the years 2011, 2010 or 2009. 206,900 CARs were granted in 2005 at an exercise price of $37.86 with a four-year vesting period and a ten-year life. During 2011, 6,600 CARs were forfeited. During 2011, 2010 and 2009, we recognized compensation expense of $(0.2) million, $0.1 million and $(0.6) million pretax and $(0.1) million, $0.1 million and $(0.4) million net of tax, respectively. The Black-Scholes option pricing model is used to determine the fair value of the CARs as of each reporting date. The assumptions used to value the CARs for the years ended December 31 were as follows:

    2011   2010   2009 

Risk-free interest rate

   0.33%     1.14%     2.12%  

Volatility of stock

   29%     33%     31%  

Expected dividend yield

   3.11%     3.00%     3.40%  

Expected life of options

   2.74 years     3.23 years     3.73 years  

1.97 years.

Dividend Reinvestment Plan

We also sponsor a Dividend Reinvestment and Stock Purchase Plan, or Dividend Plan, wherebywhere shareholders may purchase shares of S&T common stock at the average fair value with reinvested dividends and voluntary cash contributions. The plan administrator and transfer agent may purchase shares directly from us from shares held in treasury or purchase shares in the open market to fulfill the Dividend Plan’s needs.

PAGE 117


NOTE 20.21. PARENT COMPANY CONDENSED FINANCIAL INFORMATION

The following condensed financial statements summarize the financial position of S&T Bancorp, Inc. as of December 31, 20112014 and 20102013 and the results of its operations and cash flows for each of the three years ended December 31, 2011, 20102014, 2013 and 2009.

BALANCE SHEETS

December 31  2011   2010 
(in thousands)        

ASSETS

    

Cash

  $13,684    $110,889  

Investments in:

    

Bank subsidiary

   474,661     456,468  

Nonbank subsidiaries

   20,008     17,947  

Other assets

   2,937     15,010  

Total Assets

  $511,290    $600,314  

LIABILITIES

    

Long-term debt

  $20,619    $20,619  

Dividends payable

   —     694  

Other liabilities

   145     336  

Total Liabilities

   20,764     21,649  

Total Shareholders’ Equity

   490,526     578,665  

Total Liabilities and Shareholders’ Equity

  $511,290    $600,314  

STATEMENTS OF INCOME

      
Years Ended December 31  2011   2010   2009 
(in thousands)            

Dividends from subsidiaries

  $23,029    $22,634    $29,477  

Investment income

   121     86     520  

Interest expense on long-term debt

   777     782     912  

Other expenses

   1,091     1,648     1,630  

Income before Equity in Undistributed Net Income of Subsidiaries

   21,282     20,290     27,455  

Equity in undistributed net income (distribution in excess of net income) of:

Bank subsidiary

   25,590     23,158     (15,206) 

Nonbank subsidiaries

   392     32     (4,298) 

Net Income

  $47,264    $43,480    $7,951  

PAGE 118

2012.


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NOTE 20.21. PARENT COMPANY CONDENSED FINANCIAL INFORMATION —-- continued


BALANCE SHEETS

STATEMENTS OF CASH FLOWS

    
Years Ended December 31  2011  2010  2009 
(in thousands)          

OPERATING ACTIVITIES

    

Net Income

  $47,264   $43,480   $7,951  

Equity in (undistributed net income) distribution in excess of net income of subsidiaries

   (25,982)   (23,190)   19,504  

Tax expense (benefit) from stock-based compensation

   66    (46)   (4) 

Other

   10,145    470    968  

Net Cash Provided by Operating Activities

   31,493    20,714    28,419  

INVESTING ACTIVITIES

    

Net investments in subsidiaries

   —    —    —  

Acquisitions

   —    —    —  

Net Cash Used In Investing Activities

   —    —    —  

FINANCING ACTIVITIES

    

Proceeds from issuance of preferred stock and common stock warrant

   —    —    108,676  

Redemption of preferred stock

   (108,676)   —    —  

Sale of treasury shares

   1,946    3,692    1,349  

Preferred stock dividends

   (5,072)   (5,434)   (4,513) 

Cash dividends paid to common shareholders

   (16,830)   (16,683)   (25,427) 

Tax (expense) benefit from stock-based compensation

   (66)   46    4  

Net Cash (Used in) Provided by Financing Activities

   (128,698)   (18,379)   80,089  

Net (decrease) increase in cash

   (97,205)   2,335    108,508  

Cash at beginning of year

   110,889    108,554    46  

Cash at End of Year

  $13,684   $110,889   $108,554  
 December 31,
(dollars in thousands)2014
 2013
ASSETS   
Cash$38,028
 $14,852
Investments in:   
Bank subsidiary565,927
 553,825
Nonbank subsidiaries20,569
 19,561
Other assets5,567
 4,441
Total Assets$630,091
 $592,679
LIABILITIES   
Long-term debt$20,619
 $20,619
Other liabilities1,083
 754
Total Liabilities21,702
 21,373
Total Shareholders’ Equity608,389
 571,306
Total Liabilities and Shareholders’ Equity$630,091
 $592,679

STATEMENTS OF NET INCOME
 Years ended December 31,
(dollars in thousands)2014
2013
2012
Dividends from subsidiaries$46,414
$24,087
$35,603
Investment income19
15
17
Interest expense on long-term debt759
769
808
Other expenses2,014
2,579
1,800
Income before Equity in Undistributed Net Income of Subsidiaries43,660
20,754
33,012
Equity in undistributed net income (distribution in excess of net income) of:   
Bank subsidiary13,351
29,926
1,371
Nonbank subsidiaries899
(141)(183)
Net Income$57,910
$50,539
34,200

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NOTE 21. PARENT COMPANY CONDENSED FINANCIAL INFORMATION -- continued


STATEMENTS OF CASH FLOWS
 Years ended December 31,
(dollars in thousands)2014
2013
2012
OPERATING ACTIVITIES   
Net Income$57,910
$50,539
$34,200
Equity in undistributed (earnings) losses of subsidiaries(14,250)(29,785)(1,188)
Tax (benefit) expense from stock-based compensation(16)(96)30
Other(106)121
1,023
Net Cash Provided by Operating Activities43,538
20,779
34,065
INVESTING ACTIVITIES   
Net investments in subsidiaries—
—
(5,035)
Acquisitions—
—
(14,123)
Net Cash Used in Investing Activities—
—
(19,158)
FINANCING ACTIVITIES   
(Purchase) Sale of treasury shares, net(163)(88)998
Cash dividends paid to common shareholders(20,215)(18,137)(17,357)
Tax benefit (expense) from stock-based compensation16
96
(30)
Net Cash Used in Financing Activities(20,362)(18,129)(16,389)
Net increase (decrease) in cash23,176
2,650
(1,482)
Cash at beginning of year14,852
12,202
13,684
Cash at End of Year$38,028
$14,852
$12,202

NOTE 21.22. REGULATORY MATTERS

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about risk weightings and other factors.

The most recent notifications from the Federal Reserve Board and the FDIC categorized S&T and S&T Bank as well capitalized under the regulatory framework for corrective action. There have been no conditions or events that we believe have changed S&T or S&T Bank’s status during 20112014 and 2010.

2013.

Tier 1 capital consists principally of shareholders’ equity, including preferred stock; excluding items recorded in accumulated other comprehensive gain/loss,income (loss), less goodwill and other intangibles. For regulatory purposes, trust preferred securities totaling $20.0 million, issued by an unconsolidated trust subsidiary of S&T underlying junior subordinated debt, are included in Tier 1 capital for S&T. Total capital consists of Tier 1 capital plus junior subordinated debt and the ALL subject to limitation. We currently have $70.0$25.0 million in junior subordinated debt which is included in Tier 2 capital for S&T in accordance with current regulatory reporting requirements. For regulatory purposes, trust preferred

PAGE 119

NOTE 21. REGULATORY MATTERS — continued

securities totaling $20.0 million, issued by an unconsolidated trust subsidiary of S&T underlying such junior subordinated debt, are included in Tier 1 capital.

During 2011, we redeemed all of the Series A Preferred Stock. Refer to Note 22 Capital Purchase Program for additional disclosures. At December 31, 2010, Tier 1 capital included $106.1 million, representing Series A Preferred Stock of $108.7 million net of the unamortized discount of $2.6 million in accordance with the terms of the CPP and regulatory requirements.

Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of December 31, 20112014 and 2010,2013, we met all capital adequacy requirements to which we are subject.


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NOTE 22. REGULATORY MATTERS -- continued

The following table summarizes risk-based capital amounts and ratios for S&T and S&T Bank.

  Actual  For Capital Adequacy
Purposes		  To be
Well Capitalized
Under Prompt
Corrective Action
Provisions		 
   Amount  Ratio  Amount  Ratio  Amount  Ratio 
(in thousands)                  

As of December 31, 2011

      
Total Capital (to Risk-Weighted Assets)      

S&T

 $465,702    15.20%  $245,154    8.00%  $306,443    10.00% 

S&T Bank

  429,837    14.11%   243,699    8.00%   304,623    10.00% 
Tier 1 Capital (to Risk-Weighted Assets)      

S&T

  356,484    11.63%   122,577    4.00%   183,866    6.00% 

S&T Bank

  321,352    10.55%   121,849    4.00%   182,774    6.00% 
Leverage Ratio(1)      

S&T

  356,484    9.17%   155,526    4.00%   194,408    5.00% 

S&T Bank

  321,352    8.30%   154,789    4.00%   193,486    5.00% 

As of December 31, 2010

      
Total Capital (to Risk-Weighted Assets)      

S&T

 $547,336    16.68%  $262,498    8.00%  $328,123    10.00% 

S&T Bank

  405,049    12.42%   260,944    8.00%   326,180    10.00% 
Tier 1 Capital (to Risk-Weighted Assets)      

S&T

  435,823    13.28%   131,249    4.00%   196,874    6.00% 

S&T Bank

  294,113    9.02%   130,472    4.00%   195,708    6.00% 
Leverage Ratio(1)      

S&T

  435,823    11.07%   157,513    4.00%   196,891    5.00% 

S&T Bank

  294,113    7.50%   156,799    4.00%   195,999    5.00% 
 Actual 
Minimum
Regulatory Capital
Requirements
 
To be
Well Capitalized
Under Prompt
Corrective Action
Provisions
(dollars in thousands)Amount
Ratio
 Amount
Ratio
 Amount
Ratio
As of December 31, 2014        
Total Capital (to Risk-Weighted Assets)        
S&T$537,935
14.27% $301,548
8.00% $376,936
10.00%
S&T Bank475,538
12.68% 300,095
8.00% 375,119
10.00%
Tier 1 Capital (to Risk-Weighted Assets)        
S&T465,114
12.34% 150,774
4.00% 226,161
6.00%
S&T Bank403,593
10.76% 150,048
4.00% 225,071
6.00%
Leverage Ratio(1)
        
S&T465,114
9.80% 189,895
4.00% 237,369
5.00%
S&T Bank403,593
8.53% 189,182
4.00% 236,477
5.00%
As of December 31, 2013        
Total Capital (to Risk-Weighted Assets)        
S&T$494,986
14.36% $275,684
8.00% $344,606
10.00%
S&T Bank457,540
13.35% 274,257
8.00% 342,821
10.00%
Tier 1 Capital (to Risk-Weighted Assets)        
S&T426,234
12.37% 137,842
4.00% 206,763
6.00%
S&T Bank389,584
11.36% 137,128
4.00% 205,693
6.00%
Leverage Ratio(1)
        
S&T426,234
9.75% 174,824
4.00% 218,530
5.00%
S&T Bank389,584
8.95% 174,081
4.00% 217,601
5.00%
(1)

(1)Minimum requirement is 3.00 percent for the most highly-ratedhighly rated financial institutions.

NOTE 22. CAPITAL PURCHASE PROGRAM

On December 7, 2011 we redeemed all of the $108.7 million, or 108,676 shares, of Series A Preferred Stock issued on January 16, 2009 in conjunction with our participation in the CPP. Upon redemption, a one-time non-cash reduction to net income available to common shareholders of $1.8 million, or $0.06 per common share, was recorded for the remaining unamortized discount of the preferred stock. Refer to Note 21 Regulatory Matters for additional disclosures regarding capital requirements.

As part of its original purchase of the Series A Preferred Stock, the U.S. Treasury received a warrant to purchase 517,012 shares of our common stock at an initial per share exercise price of $31.53. The warrant provides for the adjustment of the exercise price and the number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon

PAGE 120

NOTE 22. CAPITAL PURCHASE PROGRAM — continued

stock splits or distributions of securities or other assets to holders of our common stock and upon certain issuances of our common stock at or below a specified price relative to the initial exercise price. A binomial pricing model was used to calculate the fair value of the common stock warrant we issued on January 16, 2009 resulting in a fair value of $4.0 million.

The assumptions used to calculate the fair value of the warrant are summarized below:

Assumption  Value 

Contractual term

   10 years  

Exercise price

  $31.53  

Estimated fair value of company stock

  $29.14  

Expected life

   10 years  

Risk-free rate over expected life of the warrant

   2.36% 

Expected volatility

   28.40% 

Expected dividend yield

   3.85% 

We utilized the average of daily and monthly historical volatility for purposes of this valuation. In addition, the U.S. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant. We did not repurchase the warrant at the time of the Series A Preferred Stock redemption and it will remain outstanding until January 2019 or until we repurchase it from the U.S. Treasury.


NOTE 23. SEGMENTS

We operate three reportable operating segments includingsegments: Community Banking, Insurance and Wealth Management and Insurance.

Management.

Our Community Banking segment offers services which include accepting time and demand accounts,deposits, originating commercial and consumer loans and providing letters of credit and credit card services.

Our Insurance segment includes a full-service insurance agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions and personal insurance lines.

Our Wealth Management segment offers discount brokerage services, services as executor and trustee under wills and deeds, guardian and custodian of employee benefits and other trust and brokerage services, as well as a registered investment advisor that manages private investment accounts for individuals and institutions.

Our Insurance segment includes a full-service insurance agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions and personal insurance lines.

The following represents total assets by reportable operating segment as of December 31:

    2011   2010 
(in thousands)        

Community Banking

  $4,110,462    $4,103,898  

Insurance

   8,192     8,461  

Wealth Management

   1,340     1,980  

Total Assets

  $4,119,994    $4,114,339  

PAGE 121

(dollars in thousands)2014
 2013
Community Banking$4,954,728
 $4,524,939
Insurance7,468
 6,926
Wealth Management2,490
 1,325
Total Assets$4,964,686
 $4,533,190

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NOTE 23. SEGMENTS —-- continued



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

    For the Year Ended December 31, 2011 
  Community
Banking		  Wealth
Management		   Insurance  Eliminations  Consolidated 
(in thousands)                 

Interest income

  $164,738   $307    $1   $33   $165,079  

Interest expense

   27,692    —     291    (250)   27,733  

Net interest income (expense)

   137,046    307     (290)   283    137,346  

Provision for loan losses

   15,609    —     —    —    15,609  

Noninterest income

   30,195    8,328     5,236    298    44,057  

Noninterest expense

   81,180    7,302     5,199    4,236    97,917  

Depreciation expense

   4,165    32     57    —    4,254  

Intangible amortization

   1,619    66     52    —    1,737  

Income tax expense (benefit)

   17,911    493     (127)   (3,655)   14,622  

Net Income (Loss)

  $46,757   $742    $(235)  $—   $47,264  
    For the Year Ended December 31, 2010 
  Community
Banking		  Wealth
Management		   Insurance  Eliminations  Consolidated 
(in thousands)                 

Interest income

  $180,319   $471    $2   $(373)  $180,419  

Interest expense

   34,692    —     293    (412)   34,573  

Net interest income (expense)

   145,627    471     (291)   39    145,846  

Provision for loan losses

   29,511    —     —    —    29,511  

Noninterest income

   32,959    7,950     4,968    1,333    47,210  

Noninterest expense

   82,872    7,525     4,850    4,181    99,428  

Depreciation expense

   4,163    34     62    —    4,259  

Intangible amortization

   1,815    75     56    —    1,946  

Income tax expense (benefit)

   17,019    324     (102)   (2,809)   14,432  

Net Income (Loss)

  $43,206   $463    $(189)  $—   $43,480  
    For the Year Ended December 31, 2009 
  Community
Banking		  Wealth
Management		   Insurance  Eliminations  Consolidated 
(in thousands)                 

Interest income

  $194,978   $530    $1   $(422)  $195,087  

Interest expense

   49,283    —     291    (469)   49,105  

Net interest income (expense)

   145,695    530     (290)   47    145,982  

Provision for loan losses

   72,354    —     —    —    72,354  

Noninterest income

   25,905    7,557     4,580    538    38,580  

Noninterest expense

   86,638    6,378     4,700    3,806    101,522  

Depreciation expense

   4,199    37     60    —    4,296  

Intangible amortization

   2,162    84     62    —    2,308  

Income tax (benefit) expense

   (1,076)   615     (187)   (3,221)   (3,869) 

Net Income (Loss)

  $7,323   $973    $(345)  $—   $7,951  

PAGE 122

 For the Year Ended December 31, 2014
(dollars in thousands)
Community
Banking

Insurance
Wealth
Management

Eliminations
Consolidated
Interest income$160,403
$2
$518
$(400)$160,523
Interest expense13,989
—
—
(1,508)12,481
Net interest income146,414
2
518
1,108
148,042
Provision for loan losses1,715
—
—
—
1,715
Noninterest income29,443
5,279
11,297
319
46,338
Noninterest expense97,733
4,313
9,173
1,427
112,646
Depreciation expense3,387
51
27
—
3,465
Amortization of intangible assets1,039
51
39
—
1,129
Provision for income taxes16,311
303
901
—
17,515
Net Income$55,672
$563
$1,675
$—
$57,910
 For the Year Ended December 31, 2013
(dollars in thousands)
Community
Banking

Insurance
Wealth
Management

Eliminations
Consolidated
Interest income$153,450
$2
$517
$(213)$153,756
Interest expense16,508
—
—
(1,945)14,563
Net interest income136,942
2
517
1,732
139,193
Provision for loan losses8,311
—
—
—
8,311
Noninterest income34,649
5,483
10,662
733
51,527
Noninterest expense94,769
5,210
9,850
2,465
112,294
Depreciation expense3,430
47
30
—
3,507
Amortization of intangible assets1,492
51
48
—
1,591
Provision (benefit) for income taxes14,180
(47)345
—
14,478
Net Income$49,409
$224
$906
$—
$50,539
 For the Year Ended December 31, 2012
(dollars in thousands)
Community
Banking

Insurance
Wealth
Management

Eliminations
Consolidated
Interest income$155,865
$1
$454
$(69)$156,251
Interest expense22,135
—
—
(1,111)21,024
Net interest income133,730
1
454
1,042
135,227
Provision for loan losses22,815
—
—
—
22,815
Noninterest income36,422
5,262
9,788
440
51,912
Noninterest expense100,474
5,569
9,717
1,482
117,242
Depreciation expense3,833
48
31
—
3,912
Amortization of intangible assets1,600
52
57
—
1,709
Provision (benefit) for income taxes7,420
(242)83
—
7,261
Net Income (Loss)$34,010
$(164)$354
$—
$34,200

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NOTE 24. OTHER NONINTEREST EXPENSE
Other noninterest expense is presented in the table below:
 Years Ended December 31,
(dollars in thousands)2014
 2013
 2012
Other noninterest expenses:     
Joint venture amortization$4,054
 $4,095
 $4,199
Loan related expenses2,579
 2,432
 2,538
Telecommunications2,220
 1,691
 1,415
Amortization of intangibles1,129
 1,591
 1,709
Other real estate owned264
 445
 2,166
Other11,224
 10,661
 12,815
Total Other Noninterest Expenses$21,470
 $20,915
 $24,842

NOTE 24.25. SELECTED FINANCIAL DATA

The following table presents selected financial data for the most recent eight quarters:

(unaudited)

   2011  2010 
 Fourth
Quarter		  Third
Quarter		  Second
Quarter		  First
Quarter		  Fourth
Quarter		  Third
Quarter		  Second
Quarter		  First
Quarter		 
(in thousands, except per share data)                   

SUMMARY OF OPERATIONS

  

      

Interest income

 $40,259   $40,845   $41,783   $42,192   $44,210   $45,325   $45,561   $45,324  

Interest expense

  6,192    6,976    7,245    7,320    7,876    8,352    8,936    9,410  

Provision for loan losses

  2,337    1,535    1,097    10,640    7,676    8,278    9,127    4,430  

Net interest income after provision for loan losses

  31,730    32,334    33,441    24,232    28,658    28,695    27,498    31,484  

Security gains (losses), net

  —    (81)   (56)   13    11    6    103    153  

Noninterest income

  11,574    10,424    11,170    11,013    11,991    12,329    11,426    11,190  

Noninterest expense

  26,672    24,193    25,594    27,449    27,018    24,948    25,735    27,930  

Income before taxes

  16,632    18,484    18,961    7,809    13,642    16,082    13,292    14,897  

Provision for income taxes

  4,376    4,681    4,051    1,514    3,352    3,600    3,888    3,593  

Net income

  12,256    13,803    14,910    6,295    10,290    12,482    9,404    11,304  

Preferred stock dividends and discount amortization

  2,939    1,559    1,558    1,555    1,553    1,551    1,549    1,547  

Net Income Available to Common Shareholders

 $9,317   $12,244   $13,352   $4,740   $8,737   $10,931   $7,855   $9,757  

Per Share Data

        

Common earnings per share — diluted

 $0.33   $0.44   $0.48   $0.17   $0.31   $0.39   $0.28   $0.35  

Dividends declared per common share

  0.15    0.15    0.15    0.15    0.15    0.15    0.15    0.15  

Common book value

  17.44    17.68    17.31    16.90    16.91    16.83    16.55    16.39  

On December 7, 2011quarters.

 2014 2013
(dollars in thousands, except per
share data) (unaudited)
Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter

 
Fourth
Quarter

Third
Quarter

Second
Quarter

First
Quarter

SUMMARY OF OPERATIONS         
Interest income$41,381
$40,605
$39,872
$38,665
 $38,779
$38,581
$38,553
$37,843
Interest expense3,315
3,076
3,017
3,074
 3,125
3,307
3,957
4,174
Provision for loan losses1,106
1,454
(1,134)289
 1,562
3,419
1,023
2,307
Net interest income after provision for loan losses36,960
36,075
37,989
35,302
 34,092
31,855
33,573
31,362
Security gains, net—
—
40
1
 —
3
—
2
Noninterest income11,220
11,931
11,731
11,415
 11,312
12,539
12,867
14,804
Noninterest expense29,720
28,440
30,165
28,914
 29,447
27,943
28,386
31,616
Income before taxes18,460
19,566
19,595
17,804
 15,957
16,454
18,054
14,552
Provision for income taxes3,963
4,906
4,875
3,771
 4,098
4,207
3,951
2,222
Net Income Available to Common Shareholders$14,497
$14,660
$14,720
$14,033
 $11,859
$12,247
$14,103
$12,330
Per Share Data         
Common earnings per share—diluted$0.49
$0.49
$0.49
$0.47
 $0.40
$0.41
$0.47
$0.41
Dividends declared per common share0.18
0.17
0.17
0.16
 0.16
0.15
0.15
0.15
Common book value20.42
20.33
20.04
19.64
 19.21
18.68
18.39
18.32

NOTE 26. SALE OF MERCHANT CARD SERVICING BUSINESS
We sold our existing merchant card servicing business for $4.8 million during the first quarter of 2013. Consequently, we redeemed allterminated an agreement with our existing merchant processor and incurred a termination fee of $1.7 million. As a result of this transaction, we recognized a gain of $3.1 million in the first quarter of 2013. In conjunction with the sale of the $108.7 million, or 108,676 shares,merchant card servicing business, we entered into a marketing and sales alliance agreement with the purchaser for an initial term of Series A Preferred Stock issued on January 16, 2009ten years. The agreement provides that we will actively market and refer our customers to the purchaser and in conjunction with our participation in the CPP. Upon redemption,return will receive a one-time non-cash reduction to net income available to common shareholders of $1.8 million, or $0.06 per common share was recorded for the remaining unamortized discount of the preferred stock.

PAGE 123

future revenue. Future revenue is dependent on the number of referrals, number of new merchant accounts and volume of activity.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

S&T Bancorp, Inc. and subsidiaries:

We have audited S&T Bancorp, Inc. and subsidiariessubsidiaries’ (the Company) internal control over financial reporting as of December 31, 2011,2014, based on criteria established inInternal Control—IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2014, based on criteria established inInternal Control—Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 20112014 and 2010,2013, and the related consolidated statements of net income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011,2014, and our report dated February 28, 201220, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Pittsburgh, Pennsylvania

February 28, 2012

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20, 2015


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

S&T Bancorp, Inc. and subsidiaries:

We have audited the accompanying consolidated balance sheets of S&T Bancorp, Inc. and subsidiaries (the Company) as of December 31, 20112014 and 2010,2013, and the related consolidated statements of net income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011.2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of S&T Bancorp, Inc. and subsidiaries as of December 31, 20112014 and 2010,2013, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011,2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011,2014, based on criteria established inInternal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 201220, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Pittsburgh, Pennsylvania

February 28, 2012

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20, 2015


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Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None


Item 9A.  CONTROLS AND PROCEDURES

a) 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)officer), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of December 31, 2011.2014. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to the Company’sS&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.

Report.

b) Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management assessed the corporation’sS&T’s system of internal control over financial reporting as of December 31, 2011,2014, in relation to criteria for effective internal control over financial reporting as described in “Internal Control—Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO) in 2013. Based on this assessment, management concludes that, as of December 31, 2011, its2014, S&T’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control—Control Integrated Framework.Framework (2013).”

KPMG LLP, independent registered public accounting firm, has issued a report on the effectiveness of S&T’s internal control over financial reporting as of December 31, 2011,2014, which is included herein.

c) Changes in Internal Control Over Financial Reporting

On May 14, 2013, COSO issued an updated version of its Internal Control - Integrated Framework, referred to as the 2013 COSO Framework and has indicated that after December 15, 2014, the 1992 Framework will be considered superseded. Our management’s assessment of the overall effectiveness of our internal controls over financial reporting for the year ending December 31, 2014 was based on the 2013 COSO Framework. The change from the 1992 Framework to the 2013 COSO Framework was not significant to our overall control structure over financial reporting.
No changes were made to S&T’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, S&T’s internal control over financial reporting.


Item 9B.  OTHER INFORMATION

Not applicable

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PART III


Item 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Part III, Item 10 of Form 10-K is incorporated herein from the sections entitled “Section 16(a) Beneficial Ownership Reporting Compliance”, “Election of Directors”, “Executive Officers of the Registrant” and “Corporate Governance and Board and Committee Meetings” in our proxy statement relating to our April 23, 2012May 20, 2015 annual meeting of shareholders.


Item 11.  EXECUTIVE COMPENSATION

This information required by Part III, Item 11 of Form 10-K is incorporated herein from the sections entitled “Compensation Discussion and Analysis;” “Executive Compensation;” “Director Compensation;” “Compensation Committee Interlocks and Insider Participation”; and “Compensation Committee Report” in our proxy statement relating to our April 23, 2012May 20, 2015 annual meeting of shareholders.


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Except as set forth below, the information required by Part III, Item 12 of Form 10-K is incorporated from the sections entitled “Principal Beneficial Owners of S&T Common Stock” and “Beneficial Ownership of S&T Common Stock by Directors and Officers” in our proxy statement relating to our April 23, 2012May 20, 2015 annual meeting of shareholders.

EQUITY COMPENSATION PLAN INFORMATION UPDATE

The following table provides information as of December 31, 20112014 related to the equity compensation plans in effect at that time.

   (a)   (b)   (c) 
Plan category  Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights		   Weighted average
exercise price of
outstanding options,
warrants and rights		   

Number of securities
remaining available for
future issuance under
equity compensation
plan (excluding securities

reflected in column (a))

 

Equity compensation plan approved by shareholders(1)

   757,050    $34.33     392,386  

Equity compensation plans not approved by shareholders

   —     —     —  

Total

   757,050    $34.33     392,386  
 (a)(b)(c)
Plan categoryNumber of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
Equity compensation plan approved by shareholders(1)
155,500
$37.855
669,545
Equity compensation plans not approved by shareholders—
—
—
Total155,500
$37.855
669,545
(1)

(1)Awards granted under the S&T Bancorp, Inc. Amended2003 and Restated 19922014 Incentive Stock Plan and the 2003 Incentive Stock Plan. The 1992 Plan expired in 2002 and no further awards may be granted thereunder.

Plans.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Part III, Item 13 of Form 10-K is incorporated herein from the sections entitled “Related Person Transactions” and “Director Independence” in our proxy statement relating to our April 23, 2012May 20, 2015 annual meeting of shareholders.

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Item 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Part III, Item 14 of Form 10-K is incorporated herein from the section entitled “Independent Registered Public Accounting Firm” in our proxy statement relating to our April 23, 2012May 20, 2015 annual meeting of shareholders.

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PART IV


Item 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)The following documents are filed as part of this report.Report.


Consolidated Financial Statements: The following consolidated financial statements are included in Part II, Item 8 of this report.Report. No financial statement schedules are being filed sincebecause the required information is inapplicable or is presented in the Consolidated Financial Statements or related notes.

Consolidated Balance Sheets

72
65 

Consolidated Statements of Net Income

73
66 
Consolidated Statements of Comprehensive Income
74

Consolidated Statements of Changes in Shareholders’ Equity

75
67 

Consolidated Statements of Cash Flows

76
68 

Notes to Consolidated Financial Statements

77
69 
Report of KPMG LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting
139
124 
Report of KPMG LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements
140125

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(b)    Exhibits


  
2.1
 Agreement and Plan of Merger, dated as of September 14, 2011,October 29, 2014, between S&T Bancorp, Inc. and Mainline Bancorp,Integrity Bancshares, Inc. Filed as Exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on September 16, 2011October 30, 2014 and incorporated herein by reference.
  2.2  Amendment No. 1 to the Agreement and Plan of Merger, dated as of January 27, 2012, between S&T Bancorp, Inc. and Mainline Bancorp, Inc., dated September 14, 2011. Filed as Exhibit A to Form S-4 Registration Statement (No. 333-178424) dated January 30, 2012 and incorporated herein by reference.
3.1
 Articles of Incorporation of S&T Bancorp, Inc. Filed as Exhibit B to Registration Statement (No. 2-83565) on Form S-4 of S&T Bancorp, Inc., dated May 5, 1983, and incorporated herein by reference.
  
3.2
 Amendment to Articles of Incorporation of S&T Bancorp, Inc. Filed as Exhibit 3.2 to Form S-4 Registration Statement (No. 33-02600) dated January 15, 1986, and incorporated herein by reference.
  
3.3
 Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective May 8, 1989, incorporated herein by reference. Filed as exhibit 3.3 to S&T Bancorp, Inc. Annual Report on Form 10-K for year ending December 31, 1998 and incorporated herein by reference.
  
3.4
 Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective July 21, 1995. Filed as exhibit 3.4 to S&T Bancorp, Inc. Annual Report on Form 10-K for year ending December 31, 1998 and incorporated hereherein by reference.
  
3.5
 Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective June 18, 1998. Filed as exhibit 3.5 to S&T Bancorp, Inc. Annual Report on Form 10-K for year ending December 31, 1998 and incorporated herein by reference.
  
3.6
 Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective April 21, 2008. Filed as Exhibit 3.1 to S&T Bancorp, Inc. Quarterly Report on Form 10-Q filed on August 7, 2008 and incorporated herein by reference.
  
3.7
 Certificate of Designations for the Series A Preferred Stock. Filed as Exhibit 3.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on January 15, 2009 and incorporated herein by reference.
  
3.8
 By-laws of S&T Bancorp, Inc., as amended, April 21, 2008. Filed as Exhibit 3.23.1 to S&T Bancorp, Inc. QuarterlyCurrent Report on Form 10-Q8-K filed on August 7, 2008March 27, 2014 and incorporated herein by reference.
10.1  S&T Bancorp, Inc. Amended and Restated 1992 Incentive Stock Plan. Filed as Exhibit 4.2 to Form S-8 Registration Statement (No. 333-48549) dated March 24, 1998 and incorporated herein by reference.*
10.2
 S&T Bancorp, Inc. 2003 Incentive Stock Plan. Filed as Exhibit 4.2 to Form S-8 Registration Statement (No. 333-111557) dated December 24, 2003 and incorporated herein by reference.*
10.3Agreement and Plan of Merger, dated as of December 16, 2007, between S&T Bancorp, Inc. and IBT Bancorp, Inc. Filed as exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on December 17, 2007 and incorporated herein by reference.

PAGE 130

(b)    Exhibits

   
10.3
10.4
 S&T Bancorp, Inc. Thrift Plan for Employees of S&T Bank, as amended and restated. Filed as Exhibit 4.2 to Form S-8 Registration Statement (No. 333-156541) dated December 31, 2008 and incorporated herein by reference.*
10.410.5
 Dividend Reinvestment and Stock Purchase Plan of S&T Bancorp, Inc. Filed as Exhibit 4.2 to Form S-3 Registration Statement (No. 333-156555) dated January 2, 2009 and incorporated herein by reference. Filed as Exhibit 4.2 to S&T Bancorp, Inc. on Form S-8 filed on January 2, 2009 and incorporated herein by reference.*
10.510.6
 Severance Agreement, by and between Todd D. Brice and S&T Bancorp, Inc., dated December 31, 2008. Filed as Exhibit 10.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on January 2, 2009 and incorporated herein by reference.*
10.7  

Severance Agreement, by and between Edward C. Hauck and S&T Bancorp, Inc., dated December 31, 2008. Filed as Exhibit 10.3 to S&T Bancorp, Inc. Current Report on Form 8-K filed on January 2, 2009 and incorporated herein by reference.*

10.6
10.8
 Severance Agreement, by and between David G. Antolik and S&T Bancorp, Inc. dated December 31, 2008. Filed as Exhibit 10.4 to S&T Bancorp, Inc. Current Report on Form 8-K filed on January 2, 2009 and incorporated herein by reference.*
10.9  Severance Agreement, by and between Gregor T. Young IV and S&T Bancorp, Inc. dated December 31, 2008. Filed as Exhibit 10.5 to S&T Bancorp, Inc. Current Report on Form 8-K filed on January 2, 2009 and incorporated herein by reference.*
10.7
10.10
 Severance Agreement, by and between Mark Kochvar and S&T Bancorp, Inc. dated as of January 1, 2009. Filed as Exhibit 10.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on February 26, 2010 and incorporated herein by reference.*
10.8
Severance Agreement, by and between David Ruddock and S&T Bancorp, Inc. dated as of January 1, 2009.*
 
10.9
S&T Bancorp, Inc. 2014 Incentive Plan. Filed as Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2013 dated February 21, 2014, and incorporated herein by reference. *
21
 Subsidiaries of the Registrant.
23
 Consent of KPMG LLP, Independent Registered Public Accounting Firm.
24
 Power of Attorney.
31.1
 Rule 13a-14(a) Certification of the Chief Executive Officer.

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(b)    Exhibits
31.2
 Rule 13a-14(a) Certification of the Principal Financial Officer.
32
 Rule 13a-14(b) Certification of the Chief Executive Officer and Principal Financial Officer.
99.1  Certification of Chief Executive Officer Pursuant to 31 C.F.R. 30.15.
101
99.2Certification of Principal Financial Officer Pursuant to 31 C.F.R. 30.15.
101**
 The following financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 20112014 is formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Net Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, and (iv)(v) Consolidated Statements of Cash Flows and (iv)(vi) Notes to Consolidated Financial Statements (tagged as blocks of text).Statements.

*Management Contract or Compensatory Plan or Arrangement
**This exhibit is furnished and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C.. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or of Securities Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

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*    Management Contract or Compensatory Plan or Arrangement

120

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.

S&T BANCORP, INC.

(Registrant)

 02/28/122/20/2015

Todd D. Brice

President and Chief Executive Officer

(Principal Executive Officer)

 Date    

 02/28/12

2/20/2015
Mark Kochvar

Senior Executive Vice President, Chief Financial Officer

(Principal Financial Officer)

 Date    

Pursuant to the requirements of the Securities Exchange Act of 1934, this reportReport has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE

Todd D. Brice

 President and Chief Executive Officer (Principal Executive Officer) 02/28/122/20/2015

Mark Kochvar

 Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) 02/28/122/20/2015

/s/ Melanie Hubler

Melanie Hubler

Lazzari		 

Senior Vice President, Controller

 02/28/122/20/2015

*

Todd D. Brice

Melanie Lazzari		 Chief Executive Officer and Director (Principal Executive Officer) 02/28/12

*

John N. Brenzia

 Director 02/28/122/20/2015

John J. Delaney

 

Director

 02/28/12

*

Michael J. Donnelly

 Director 02/28/122/20/2015
Michael J. Donnelly
/s/ William J. GattiDirector2/20/2015
William J. Gatti
/s/ Jeffrey D. GrubeDirector2/20/2015
Jeffrey D. Grube

PAGE 132


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SIGNATURE TITLE DATE

*

William J. Gatti

/s/ Frank W. Jones		 Director 02/28/122/20/2015
Frank W. Jones

*

Jeffrey D. Grube

/s/ Joseph A. Kirk Director 02/28/122/20/2015
Joseph A. Kirk

Frank W. Jones

/s/ David L. Krieger Director 02/28/122/20/2015
David L. Krieger

Joseph A. Kirk

 Director 02/28/122/20/2015
James C. Miller

*

David L. Krieger

/s/ Fred J. Morelli Jr Director 02/28/122/20/2015
Fred J. Morelli, Jr.

*

James C. Miller

/s/ Frank J. Palermo Jr.Director2/20/2015
Frank J. Palermo, Jr.
Director2/20/2015
Christine J. Toretti
 Chairman of the Board and Director 02/28/122/20/2015
Charles G. Urtin

*

Alan Papernick

By: /s/ Joseph A. Kirk		 Director 02/28/122/20/2015

Robert Rebich, Jr.

Joseph A. Kirk
Attorney-in-fact		 Director 02/28/12

*

Charles A. Spadafora

Director02/28/12

Christine J. Toretti

Director02/28/12

*

Charles G. Urtin

Director02/28/12

*By: /s/ James V. Milano

        James V. Milano

        Attorney-in-fact

Director02/28/12

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