Proxy Statement for the 2016 Annual Meeting of Shareholders and 2015 Annual Report on Form 10-K
TO THE SHAREHOLDERS OF S&T BANCORP, INC.:
Success comes from knowing who you are, what you do best, and doing it consistently while always remaining open to opportunities to grow and improve. Easy to say, not always easy to do, but that’s exactly what our team at S&T Bancorp accomplished once again in 2015. In fact, we finished the year with $67.1 million in net income, a new record for our bank.
As always, we attribute our performance to traditional, long-held practices of good core banking, focused on placing people first. We know who we are - we build relationships one customer at a time.
Loan and deposit growth remains our primary focus, while also carefully controlling operating and credit expenses. The ongoing low-interest rate environment remains a challenge for expanding our net interest income, but our steady organic growth helps to mitigate the impact. We know what we do best, and we do it consistently.
Expansion into markets in southcentral Pennsylvania, northeast and central Ohio, and western New York State, bolstered by branch upgrades in our core western Pennsylvania footprint, provide opportunities to extend the S&T brand and grow business in new ways. We evaluate and act upon suitable opportunities to grow profitably and enhance shareholder value.
So, driven by strong organic growth, combined with the successful merger with Integrity Bancshares, the expansion of loan production offices (LPO), and the installation of new technology-enhanced Innovation Centers, we have been able once again to offer healthy returns to our shareholders in 2015. It remains our formula for success.
2015 Financials
Here are some of the financial highlights from 2015:
• Net income increased $9.2 million, or 16 percent, to a record $67.1 million, or $1.98 per diluted share, compared to $57.9 million, or $1.95 per diluted share for 2014.
• For 2015, return on average assets was 1.13 percent; return on average equity was 8.94 percent; and return on tangible equity was 14.39 percent.
• Net interest income increased $39.5 million, or 27 percent, to $187.6 million compared to $148.0 million in 2014, driven primarily by loan growth of $1.2 billion.
• We remain focused on running our business efficiently. During 2015, we had positive operating leverage with total revenue growth of $44.2 million, or 23 percent, while operating expenses increased $19.5 million, or 17 percent, compared to 2014.
1 • Net interest margin, on a fully taxable-equivalent, or FTE, basis, increased to 3.56 percent in 2015 compared to 3.50 percent for 2014.
• Total shareholders’ equity was $792.2 million as of December 31, 2015, an increase of $183.8 million, or 30 percent, compared to the end of 2014.
• Lastly, the Board of Directors declared dividends of $0.73 per share during 2015, a 7.4 percent increase from the 2014 declared dividends per share of $0.68.
2015 Highlights
In March 2015, Integrity Bancshares became part of S&T, which expanded our geographic footprint into southcentral Pennsylvania with eight branches in Cumberland, Dauphin, Lancaster, and York Counties. Integrating the Integrity organization into ours not only gave us access to attractive new geographic markets, but it also provided a natural continuation and extension of the S&T approach to personalized banking. We discovered that we share similar philosophies and began witnessing the benefits immediately in solid loan production, customers who value access to knowledgeable bankers, and employees who mirror our people-first attitude with those customers.
Commercial banking - including the corporate and business banking segments - established itself once more in 2015 as a clear competitive differentiator, with loan production totaling $1.3 billion, attributable to a seasoned team of bankers who consistently excel in building strong and longstanding relationships with customers.
Our organic growth strategy in 2015 also manifested itself in new geographic markets beyond Pennsylvania, as we expanded Commercial lending operations with an LPO in Rochester, NY, to serve the western region of New York State. This office joins our other LPOs in Akron and Columbus, Ohio.
A number of significant developments occurred within our Retail segment, all of which helped to create another strong year. We introduced an exciting new concept this year, with the opening of two new Branch Innovation Centers - one in Indiana, PA (Indian Springs) and the other in suburban Pittsburgh (McCandless Crossings). These centers demonstrate our belief that one-to-one personalized banking services can be blended successfully with advanced technology, to create a more comprehensive and convenient delivery platform.
For example, both Branch Innovation Centers feature a “Tech Bar” where customers can use tablets and in-branch wi-fi to perform routine banking services, along with a series of “pods” to sit with bank representatives to discuss products, services, and any other areas of interest. Our philosophy regarding technology has not changed. We see it as a valuable tool - not an end unto itself, but always in the service of our customers.
The Wealth Management business had assets under management of $2.1 billion, providing brokerage and various trust services, along with serving as a registered investment advisor for private investment accounts. Our Insurance group had a solid year of new business generation in 2015, along with very high customer retention.
It’s important to state, however, that all of the results referenced in this letter happen only because of our people. We enjoy a number of admirable qualities across this organization, but the most striking - and 2 the most crucial - remains the fact that S&T attracts and retains great bankers. I believe the truth and power of that statement extends from our Board and senior leadership team through every level, every location, and every individual who personifies our brand every day.
Part of what makes our team so valuable and valued can be seen in how we support our communities. From programs that promote and celebrate financial education - like Teach Children to Save, Get Smart About Credit, the Smart Start Scholarship, and My School-My Award - to holiday programs like Deck the Halls with S&T Bank - we donated nearly $1 million to various charitable and community organizations across our markets in 2015. But just as important, our employees have volunteered untold hours to help create a better quality of life in the communities we call home.
Everything we do for our customers led S&T to be selected as a 2015 Bank & Thrift Sm-All Star by Sandler O'Neill + Partners in its annual list of top-performing small-cap banks and thrifts across the nation. As one of only 34 banks in the country (from a pool of 435), our selection for the 2015 listing would be honor enough. But what makes this year’s recognition even more remarkable is the fact that 2015 makes it the third consecutive year - and the fourth year overall - that Sandler O'Neill + Partners has placed us on its prestigious list, making us one of only five banks to earn this even more exclusive distinction.
I firmly believe this award stands as a testament to our people who are committed to providing strong relationship banking experiences for our customers while simultaneously carrying out our bank strategy. In much the same light, I wanted to acknowledge our Board of Directors for its staunch support and invaluable guidance, even as we mourn the loss of Fred Morelli, who served on the Board for three years prior to his passing. His wisdom and contributions to our organization will be missed.
Most of all, I join with the appreciation and gratitude of every member of our S&T team for your ongoing belief as shareholders in our formula for success - knowing who we are, consistently doing what we do best, and seizing opportunities to grow and improve. We pledge to continue on this path, with the intent of providing you with long-term value for your investment in us.
Sincerely,
Todd D. Brice President and Chief Executive Officer
3
S&T Bancorp, Inc. 800 Philadelphia Street Indiana, Pennsylvania 15701 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS May 16, 2016
To the Shareholders of S&T Bancorp, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of S&T Bancorp, Inc. (“S&T”) will be held on May 16, Statement Proxy 2016, at 10:00 a.m. Eastern Time, at the S&T Support Center, located at Indiana West Plaza, 2416 Philadelphia Street, Indiana, Pennsylvania 15701, for the purpose of considering and voting on the following matters:
1. The election of fourteen directors to serve a one-year term until the next annual meeting of shareholders and until their respective successors are elected and qualified; 2. To ratify the selection of KPMG LLP as an independent registered public accounting firm for the fiscal year 2016; 3. To approve a non-binding advisory proposal on the compensation of S&T’s executive officers; and 4. The transaction of such other business as may properly come before the meeting or any adjournment thereof.
Only shareholders of record at the close of business on March 28, 2016 are entitled to notice of and to vote at such meeting or any adjournment thereof.
By Order of the Board of Directors,
Ernest J. Draganza Secretary
Indiana, Pennsylvania April 6, 2016
IMPORTANT
YOUR VOTE IS IMPORTANT. IN ORDER TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED FOR MAILING IN THE UNITED STATES.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ELECTION AS DIRECTORS OF THE NOMINEES NAMED IN THIS PROXY STATEMENT, FOR THE RATIFICATION OF THE SELECTION OF KPMG LLP AS AN INDEPENDENT REGISTERED ACCOUNTING FIRM FOR FISCAL YEAR 2016 AND FOR THE NON-BINDING ADVISORY PROPOSAL ON THE COMPENSATION OF S&T’S EXECUTIVE OFFICERS. IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2016 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 16, 2016
The Securities and Exchange Commission (the “SEC”) adopted the Notice and Access rule, whereby corporate issuers must make proxy materials available on a public website, and may choose to send a Notice of Internet Availability of Proxy Materials (“Notice”) in place of the complete proxy package. For our 2016 Annual Meeting, to save significant printing and mailing expenses, S&T mailed a Notice to all shareholders, who had not previously elected to receive their proxy materials through the mail, to inform them of the electronic availability of the proxy materials 40 days in advance of the Annual Meeting.
S&T’s Proxy Statement for the 2016 Annual Meeting of Shareholders and S&T’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 in a combined document are available at http://proxyvote.com.
IMPORTANT NOTICE REGARDING DELIVERY OF SECURITY HOLDER DOCUMENTS
The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more shareholders sharing the same address by delivering a single proxy statement addressed to those shareholders. This process is commonly referred to as “householding.”
S&T has implemented “householding” in an effort to reduce the number of duplicate mailings to the same address. This process benefits both shareholders and S&T, because it eliminates unnecessary mailings delivered to your home and helps to reduce S&T’s expenses. “Householding” is not being used, however, if S&T has received contrary instructions from one or more of the shareholders sharing an address. If your household has received only one annual report and one proxy statement, S&T will deliver promptly a separate copy of the annual report and the proxy statement to any shareholder who contacts S&T’s transfer agent, American Stock Transfer & Trust Company (“AST”), by calling their toll-free number, 1-800-937-5449, or by mail to the attention of the Operations Center at 6201 15th Avenue, Brooklyn, NY 11219. You can also notify S&T that you would like to receive separate copies of S&T’s annual report and proxy statement in the future by calling AST. Even if your household has received only one annual report and one proxy statement, S&T will continue to send a separate proxy card for each shareholder residing at your address. Please note, however, that if you also hold shares of S&T in “street name” (e.g., in a brokerage account or retirement plan account) you may continue to receive duplicate mailings.
Each proxy card should be signed, dated and returned in the enclosed self-addressed envelope. If your household has received multiple copies of S&T’s annual report and proxy statement, you can request the delivery of single copies in the future by calling AST, as instructed above, or your broker, if you hold the shares in “street name.”
For our 2017 Annual Meeting, you can help us save significant printing and mailing expenses by consenting to access our proxy materials and annual report electronically via the Internet. If you hold your shares in your own name (instead of “street name” through a bank, broker or other nominee), you can choose this option by following the prompts for consenting to electronic access, if voting by telephone, or by following the instructions at the Internet voting website at www.proxyvote.com, which has been established for you to vote your shares for the 2016 Annual Meeting. If you choose to receive your proxy materials and annual report electronically, then prior to next year’s annual meeting you will receive notification when the proxy materials and annual report are available for on-line review via the Internet, as well as the instructions for voting electronically via the Internet. Your choice for electronic distribution will remain in effect until you revoke it by sending a written request to AST at the Operations Center at 6201 15th Avenue, Brooklyn, NY 11219. If you hold your shares in “street name” through a bank, broker or other nominee, you should follow the instructions provided by that entity if you wish to access our proxy materials electronically via the Internet. TABLE OF CONTENTS
Page INTRODUCTION 1 MEETING INFORMATION 1 BENEFICIAL OWNERS OF S&T COMMON STOCK 2 BENEFICIAL OWNERSHIP OF S&T COMMON STOCK BY DIRECTORS AND OFFICERS 3 PROPOSAL 1: ELECTION OF DIRECTORS 4 CORPORATE GOVERNANCE 7 DIRECTOR COMPENSATION 14 rx Statement Proxy PROPOSAL 2: RATIFICATION OF THE SELECTION OF INDEPENDENT REGISTERED PUBLIC 16 ACCOUNTING FIRM FOR FISCAL YEAR 2016
PROPOSAL 3: ADVISORY VOTE ON S&T’S EXECUTIVE COMPENSATION 17 EXECUTIVE OFFICERS OF THE REGISTRANT 18 COMPENSATION DISCUSSION AND ANALYSIS 19 COMPENSATION AND BENEFITS COMMITTEE REPORT 33 EXECUTIVE COMPENSATION 35 RELATED PERSON TRANSACTIONS 43 REPORT OF THE AUDIT COMMITTEE 45 SHAREHOLDER PROPOSALS 46 OTHER MATTERS 46 [THIS PAGE INTENTIONALLY LEFT BLANK] S&T BANCORP, INC. PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 16, 2016
INTRODUCTION
This Proxy Statement is being furnished to shareholders of S&T Bancorp, Inc. (“S&T”) in connection with the solicitation of proxies by the Board of Directors of S&T (the “S&T Board”) for use at the Annual Meeting of Shareholders, and any adjournments thereof, to be held at the time and place set forth in the accompanying notice (“Annual Meeting”). This Proxy Statement is being mailed to shareholders on or about April 6, 2016.
At the Annual Meeting, shareholders of S&T will be asked to elect fourteen directors of S&T to serve a one-year term, to approve the ratification of the selection of KPMG LLP as an independent registered public accounting firm for the fiscal year 2016 and to approve a non-binding advisory proposal on the compensation of S&T’s executive officers. rx Statement Proxy
All shareholders are urged to read this Proxy Statement carefully and in its entirety.
MEETING INFORMATION
Date, Time and Place
The Annual Meeting will be held on May 16, 2016, at 10:00 a.m. Eastern Time at the S&T Support Center, located at Indiana West Plaza, 2416 Philadelphia Street, Indiana, Pennsylvania 15701.
Record Date, Voting Rights
The securities that can be voted at the Annual Meeting consist of shares of common stock of S&T, par value $2.50 per share (“Common Stock”), with each share entitling its owner to one vote on all matters. Only holders of the Common Stock at the close of business on March 28, 2016 (the “Record Date”) will be entitled to notice of and to vote at the Annual Meeting. There were 3,001 record holders of the Common Stock and 34,810,374 shares of Common Stock outstanding as of the Record Date.
A quorum is required for the transaction of business at the Annual Meeting. A “quorum” is the presence at the meeting, in person or represented by proxy, of the holders of the majority of the outstanding shares of Common Stock. Abstentions are counted for purposes of determining the presence or the absence of a quorum, but are not considered a vote cast under Pennsylvania law. Abstentions will not affect the outcome of a vote on a particular matter. Shares held by brokers in street name and for which the beneficial owners do not vote on a particular proposal because the brokers do not have discretionary voting power and have not received instructions from the beneficial owners to vote on that item are called “broker non- votes.” Brokers and banks have discretionary authority to vote shares in absence of instructions considered “routine,” such as the ratification of the appointment of the auditors. They do not have discretionary authority to vote shares in absence of instructions on “non-routine” matters, such as the election of directors and the advisory vote on the approval of executive compensation. Broker non-votes are counted to determine if a quorum is present, but are not considered a vote cast under Pennsylvania law. Broker non-votes will not affect the outcome of a vote on a particular matter.
The director nominees will be elected by a plurality of the votes cast at the Annual Meeting, which means that the fourteen nominees receiving the most votes will be elected. A withheld vote on any nominee will not affect the voting results. The ratification of the selection of KPMG LLP as an independent registered accounting firm for fiscal year 2016 and the approval of the non-binding advisory proposal on the compensation of S&T’s executive officers require the affirmative vote of a majority of the votes cast at the Annual Meeting on the item to be approved.
Voting and Revocation of Proxies
If the appropriate enclosed form of proxy is properly executed and returned to S&T in time to be voted at the Annual Meeting, the shares represented thereby will be voted in accordance with the instructions marked thereon. Executed but unmarked proxies will be voted “FOR” the ratification of the selection of KPMG LLP as an independent registered accounting firm for fiscal year 2016. Except for procedural matters incident to the conduct of the Annual Meeting, S&T does 1 not know of any matters other than those described in the Notice of Annual Meeting that are to come before the Annual Meeting. If any other matters are properly brought before the Annual Meeting, the persons named in the accompanying proxy will vote the shares represented by the proxies in their discretion on such matters as recommended by a majority of the S&T Board.
The presence of a shareholder at the Annual Meeting will not automatically revoke such shareholder’s proxy. However, a shareholder may revoke a proxy at any time prior to its exercise by filing with the Secretary of S&T a written notice of revocation, by delivering to S&T a duly executed proxy bearing a later date or by attending the Annual Meeting and voting in person.
Solicitation of Proxies
The cost of soliciting proxies in the form enclosed herewith will be borne by S&T. In addition to the solicitation of proxies by mail, S&T has engaged D.F. King & Co., Inc. to help solicit proxies for the Annual Meeting, and will pay D.F. King & Co., Inc. $7,000, plus its out-of-pocket expenses, for the solicitation of proxies. S&T may also solicit proxies personally or by telephone, through its directors, officers and regular employees. S&T also will request persons, firms and corporations holding shares of Common Stock in their names or in the name of their nominees, which are beneficially owned by others, to send proxy materials to and obtain proxies from the beneficial owners and will reimburse the holders for their reasonable expenses in so doing.
Internet Availability of Proxy Materials
S&T’s Proxy Statement for the 2016 Annual Meeting of Shareholders and S&T’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, are available at http://proxyvote.com.
BENEFICIAL OWNERS OF S&T COMMON STOCK
Under Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), a beneficial owner of a security is any person who directly or indirectly has or shares voting power or investment power over such security. Such beneficial owner under this definition need not enjoy the economic benefit of such securities. The following are the only shareholders known to S&T to be deemed to be a beneficial owner of 5% or more of Common Stock as of December 31, 2015, and S&T has relied solely on information provided in the public filings made by the holders below:
Amount and Nature of Percent of Title of Class Name and Address of Beneficial Owner Beneficial Ownership Class Common Stock BlackRock Inc. 3,519,959 (1) 10.10% 55 East 52nd Street New York, NY 10022 Common Stock The Vanguard Group, Inc. 2,688,745 (2) 7.72% 100 Vanguard Blvd. Malvern, PA 19355
(1) According to its Schedule 13G/A filed with the SEC on January 8, 2016, BlackRock, Inc. has sole dispositive power of 3,519,959 shares and sole voting power of 3,436,308 shares. The percentage of ownership is calculated as of the filing date of the Schedule 13G/A. (2) According to its Schedule 13G/A filed with the SEC on February 10, 2016, The Vanguard Group, Inc. has sole dispositive power for 2,644,299 shares and shared dispositive power for 44,446 shares. The number of shares Vanguard Group, Inc. has sole power to vote or direct to vote is 42,946 and shared power to vote or direct to vote is 3,600. The percentage of ownership is calculated as of the filing date of the Schedule 13G/A.
S&T is not aware of any other person who beneficially owns more than 5% of any class of securities of S&T other than those listed above.
2 BENEFICIAL OWNERSHIP OF S&T COMMON STOCK BY DIRECTORS AND OFFICERS
The following table sets forth, as of March 28, 2016, the amount and percentage of Common Stock beneficially owned by each director, each nominee for director and each of the Named Executive Officers (as defined below) of S&T, as well as the directors and executive officers of S&T as a group. Unless otherwise indicated, all persons listed below have sole voting and investment power of all shares of Common Stock. The business address of each of S&T’s directors and officers is 800 Philadelphia Street, Indiana, Pennsylvania 15701.
Shares of Common Stock Percent Name Beneficially Owned (1) Owned David G. Antolik 31,141 * Todd D. Brice 101,948 * John J. Delaney 72,216 * Michael J. Donnelly 27,102 *
Ernest J. Draganza 31,078 * Statement Proxy William J. Gatti 26,221 * James T. Gibson 405,410 1.16 Jeffrey D. Grube 22,571 * Jerry D. Hostetter 15,003 * Frank W. Jones 26,651 * Mark Kochvar 48,542 * David L. Krieger 18,046 * James C. Miller 64,738 * Frank J. Palermo, Jr. 14,990 * David P. Ruddock 44,909 * Christine J. Toretti 22,730 * Charles G. Urtin 25,512 * Steven J. Weingarten 81,502 * All current directors and executive officers as a group (23 persons) 1,151,683 3.31
(1) May include shares held by spouse, other family members, as trustee or through a corporation. Mr. Brice disclaims beneficial ownership of 1,475 shares that are directly owned by his spouse and 4,776 shares that are directly owned by his daughters. Mr. Miller disclaims beneficial ownership of 17,760 shares that are directly owned by his spouse. Mr. Gibson disclaims beneficial ownership of 4,125 shares directly owned by his spouse. * Less than 1% of the outstanding Common Stock.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires S&T’s directors and executive officers, and persons who own more than 10% of S&T’s stock, to report to the SEC certain of their transactions with respect to S&T’s Common Stock. The SEC reporting rules require that changes in beneficial ownership generally be reported on Form 4 within two business days after the date on which the change occurs. A Form 3 to report stock holdings in S&T must be filed within ten days of when a director, executive officer or person who owns more than 10% of S&T’s stock becomes subject to Section 16(a) of the Exchange Act.
Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2015, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were filed in a timely manner, except for a late Form 4 for Mr. William Poole. The transaction occurred while Mr. Poole was an officer of S&T. The late filing was inadvertent.
3 PROPOSAL 1—ELECTION OF DIRECTORS
General
The By-laws of S&T provide that the number of directors constituting the S&T Board will consist of not less than nine (9) nor more than seventeen (17), with the exact number to be fixed and determined from time to time by resolution of a majority of the S&T Board. Following the death of Fred J. Morelli in December 2015, the S&T Board fixed the number of directors at fourteen (14).
The nominees were each recommended by our Nominating and Corporate Governance Committee (the “Nominating Committee”) to the S&T Board. Each director nominee will serve a one-year term. All of the nominees have indicated their willingness to serve, if elected, but if any should be unable or unwilling to serve, proxies may be voted for a substitute nominee designated by the S&T Board. There are no family relationships between or among any of our directors, executive officers or persons nominated or chosen to become a director or executive officer, except that Director Delaney’s son is married to Director and CEO Brice’s sister. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the nominees named below.
Set forth below is a brief description of the principal occupation and business experience of each of our nominees for director, as well as the summary of our views as to the qualifications of each nominee and continuing director to serve on the S&T Board and each board committee of which he or she is a member. Our views are informed not only by the current and prior employment and educational background of our directors, but also by the S&T Board’s experience in working with their fellow directors. The S&T Board has had significant experience with the incumbent directors and has had the opportunity to assess the contributions that the directors have made to the S&T Board as well as their industry knowledge, judgment and leadership capabilities. The Nominating Committee continually assesses the tenure and diversity of the S&T Board and seeks opportunities, within the constraint of the size of the S&T Board, to include a mix of directors with S&T Board experience and with fresh perspectives. After the addition of Messrs. Morelli and Palermo to the S&T Board in 2013, the acquisition of Integrity Bancshares, Inc. ("Integrity") in 2015 offered the Nominating Committee the opportunity to add three additional new directors to the S&T Board to further diversify the S&T Board’s industry knowledge, judgment and leadership capabilities.
Director Nominees to be Elected at the 2016 Annual Meeting:
Todd D. Brice, 53, has served as a director of S&T since 2005. Mr. Brice has been President and Chief Executive Officer of S&T and S&T Bank since 2008 and was formerly President and Chief Operating Officer of S&T and S&T Bank from 2004 until 2008 and Executive Vice President of Commercial Lending at S&T and S&T Bank from 2002 until 2004. With 30 years of banking experience, including 14 years of senior management experience at S&T, we believe that Mr. Brice’s deep industry knowledge and his expertise in our operations, commercial lending and corporate strategy provides the S&T Board with significant insight across a broad range of issues critical to our business. As our Chief Executive Officer, Mr. Brice provides unique insight to the S&T Board regarding our day-to-day operations, customer information, competitive intelligence, general trends in national and local banking and issues regarding our financial results.
John J. Delaney, 74, has served as a director of S&T since 1987 and is a member of the Compensation and Benefits Committee (the "Compensation Committee") and the Nominating Committee. Mr. Delaney has been the president of Delaney Chevrolet, Inc. since 1971 and president of Riehle Chevrolet, Inc. d/b/a Star Chevrolet, Nissan, Volvo since 1983. We believe that Mr. Delaney’s 44 years of experience in the retail auto industry provides the S&T Board with important experience regarding consumer lending and loan risk management. Mr. Delaney’s extensive board experience during his career, including his service as a director on the board of the Indiana Chamber of Commerce, the Indiana Industrial Development Authority and the Indiana County Airport Authority Board, affords him valuable insight into the local business community. Mr. Delaney’s management experience and board service, along with his deep experience as a long-standing member of the S&T Board, also qualify him to serve on our Compensation Committee and our Nominating Committee. We also believe that Mr. Delaney’s experience operating a series of auto dealerships provides the Compensation Committee with experience regarding motivating our executive team through our various compensation plans and policies.
Michael J. Donnelly, 58, has served as a director of S&T since 2001 and is a member of the Compensation and Benefits Committee and the Nominating Committee. Mr. Donnelly has been president of Indiana Printing and Publishing Company, Inc. since 1993. We believe that Mr. Donnelly’s deep experience in managing and operating a local business provides the S&T Board with valuable insight into the issues addressing our local corporate and consumer borrowers. Mr. Donnelly has
4 spent over 26 years working with the Indiana County Chamber of Commerce and the Indiana County Development Corporation in retaining and attracting many businesses in the Indiana, PA area. Mr. Donnelly’s experience in developing appropriate compensation for the executives and senior management of his company qualifies him to serve on our Compensation Committee, and his experience on the S&T Board provides him with a solid background for service on our Nominating Committee.
William J. Gatti, 74, has served as a director of S&T since 1993. Mr. Gatti is the owner of Gatti Medical Supply, Inc., a medical distribution company, and has served as the chief executive officer of Gatti LTC Pharmacy, a long term care provider since 2008. Mr. Gatti was the founder and former chief executive officer and chairman of Millennium Pharmacy Systems, Inc., a long term care provider, from 2003 until 2008. Mr. Gatti is also the founder and acting CEO of RxHealth Connect LLC, a medication management services company. Mr. Gatti was also the owner and operator of Gatti Retail Pharmacy. We believe that Mr. Gatti’s experience in the medical industry offers valuable perspective and significant expertise to the S&T Board, and provides the S&T Board with a strategic outlook and management experience into operations and lending opportunities in the medical and medical care industries. rx Statement Proxy James T. Gibson, 60, has served as a director of S&T since March 2015. Mr. Gibson served as chairman, president and chief executive officer of Integrity since its inception in June 2003 until it was acquired by S&T in March 2015, and served as president and chief executive officer of Integrity Bank, a role he also held since its inception in June 2003 until it was merged into S&T Bank in May 2015. Previously, Mr. Gibson served as president and chief executive officer of Commerce Bank/Harrisburg from 1988 to 2002.We believe that Mr. Gibson’s more than 37 years of banking experience and detailed knowledge about the development and operations of Integrity Bank qualify him to serve on our Board. Mr. Gibson assisted the S&T Board with transition and integration issues following the acquisition of Integrity in 2015.
Jeffrey D. Grube, 62, has served as a director of S&T since 1997 and is Chairman of the Compensation Committee and a member of the Audit Committee. Mr. Grube has served as President of B.F.G. Electroplating and Manufacturing Company as well as B.F.G. Manufacturing Service, Inc. since 1990. Mr. Grube’s career as an executive in the manufacturing industry includes financial and engineering experience. Mr. Grube’s extensive experience working with small and medium-sized businesses provides the S&T Board with valuable experience regarding potential borrowers and customers, customer relations, lending issues and credit risk. Mr. Grube also served as a director on the board of a privately held company that supplies compliance products for lending solutions. Mr. Grube’s executive and board experience in the manufacturing sector and experience with financial institutions allow him to bring relevant insight regarding regulatory and financial compliance issues to the S&T Board, including the Audit Committee and the Compensation Committee.
Jerry D. Hostetter, 54, has served as a director of S&T since March 2015 and is a member of the Audit Committee and the Compensation Committee. Mr. Hostetter has served as a partner at Prestige Investment Group since its founding in 2012. Prior to that, Mr. Hostetter was the Vice President of Fund Development and Legislative Affairs of Ephrata Community Hospital from 2008 through 2011. Mr. Hostetter previously served on the board of Integrity from 2011 until it was acquired by S&T in March 2015. We believe that Mr. Hostetter’s experience in the Pennsylvania business community and knowledge gained from his service as a director of Integrity qualify him to serve on the S&T Board and on the Audit Committee and Compensation Committee.
Frank W. Jones, 70, has served as a director of S&T since 1997 and is Chairman of the Nominating Committee and a member of the Audit Committee. In January 2015, Mr. Jones became of counsel with the law firm of Creenan & Baczkowski, PC in Murrysville, PA. Prior to joining the law firm, Mr. Jones was practicing independently in Allegheny County from 1970 to December 2014. Mr. Jones joined the S&T Board following the acquisition of People’s Bank of Unity, a regional financial institution, where he served on the board of directors. Mr. Jones assisted the S&T Board with integration and strategic issues following the acquisition. Mr. Jones’ legal practice, which focuses on estate administration and estate litigation, allows him to provide valuable insight to the S&T Board specifically with respect to our Wealth Management division, including on such issues as customer acquisition, marketing, strategic considerations, compliance and legal risk. We believe that Mr. Jones’ experience as a director of a similar bank to S&T Bank, together with his legal experience as it relates to one of our core businesses and his years of experience on the S&T Board, qualify him to serve as a director and serve on our Audit Committee and Nominating Committee.
David L. Krieger, 72, has served as a director of S&T since 2007. Mr. Krieger is retired but was formerly Senior Executive Vice President and Commercial Lending Group Manager of S&T and S&T Bank. We believe that Mr. Krieger’s 24 years of experience at S&T, including leading our commercial lending group, adds valuable experience to the S&T Board.
5 Mr. Krieger has deep knowledge of our lending practices and our customer base, and his commercial lending experience, both at S&T and at his prior employer, provides the S&T Board with significant operational insights regarding credit risk.
James C. Miller, 70, has served as a director since 1993. Mr. Miller served as Chairman of S&T and S&T Bank from 2004 to 2013. Mr. Miller is retired but was formerly Chief Executive Officer of S&T and S&T Bank from 1998 until 2008 and President of S&T and S&T Bank from 1993 until 2005. We believe that Mr. Miller’s banking experience, including 37 years with S&T or a bank acquired by S&T and his service as our former chief executive officer, provides him with a unique perspective of our business, including our markets, customer base, senior management, key employees, potential customers, and operations and finances, and qualifies him to serve on the S&T Board.
Frank J. Palermo, 63, has served as a director since January 2013 and is Chairman of the Audit Committee and a member of the Nominating Committee. Mr. Palermo is a Certified Public Accountant and a Certified Valuation Analyst, and has been the managing shareholder of Palermo/Kissinger & Associates, P.C. since 1983. Mr. Palermo played an integral role in forming Gateway Bank of Pennsylvania (“Gateway”), where he served as chairman of the audit committee from its inception in 2004 through the date S&T acquired Gateway in 2012. Mr. Palermo’s career also includes 37 years in public accounting and four years as a vice president and controller at a community bank. We believe that Mr. Palermo’s background in accounting and finance, as well as his prior bank audit committee experience, bring a valuable perspective to the S&T Board both with respect to accounting, financial and strategic aspects of S&T’s business and to the Audit Committee on which he serves as “audit committee financial expert.” We further believe that Mr. Palermo’s extensive board experience qualifies him to be a member of the S&T Board and to serve on the Audit Committee and the Nominating Committee.
Christine J. Toretti, 59, has served as Vice Chairman of S&T and S&T Bank since 2013 and a director of S&T since 1984. Ms. Toretti is a member of the Nominating Committee. Ms. Toretti has been the president of Palladio, LLC since 2011 and was the chairman and chief executive officer of S.W. Jack Drilling Company from 1990 through 2010. Ms. Toretti has been the president of The Jack Company since 1988, president of Plum Production, Inc. since 1991, and president of CJT, LLC since 2002, each of which is a natural gas investment company. Ms. Toretti is a board of director member for the EQT Corporation since October 2015. Ms. Toretti’s deep industrial and energy experience provides the S&T Board with a strategic outlook regarding lending and other commercial opportunities in these sectors, her experience of leading a family business allows her to offer the S&T Board valuable management perspective and credit risk assessment with respect to our industrial and oil and gas borrowers, and her board experience, including in the role of chairman, qualifies her to serve as Vice Chairman of the S&T Board and on the Nominating Committee.
Charles G. Urtin , 69, has served as Chairman of S&T and S&T Bank since 2013 and was formerly Vice Chairman of S&T and S&T Bank from 2008 to 2013. Mr. Urtin is retired but was formerly president and chief executive officer of IBT Bancorp, Inc. and Irwin Bank. We believe that Mr. Urtin’s 40 years of banking experience, including serving as chief executive officer of IBT Bancorp and Irwin Bank, provides the S&T Board with valuable industry, strategic, financial and operational insight, and his long-standing presence as a leader of a regional bank operating in our geographic market assists the S&T Board with customer acquisition, credit risk analysis and loan portfolio management. Mr. Urtin assisted the S&T Board with transition and integration issues following our acquisition of IBT Bancorp in 2008.
Steven J. Weingarten, 57, has served as a director of S&T since March 2015 and is a member of the Compensation Committee and the Nominating Committee. Mr. Weingarten has been an attorney at McNees Wallace & Nurick LLC since 1989, and a Member since 1993. Additionally, he served as Managing Partner of McNees Wallace & Nurick LLC from 2002 to 2006. Mr. Weingarten previously served on the board of Integrity from 2003 until it was acquired by S&T in March 2015. We believe that Mr. Weingarten’s experience in managing McNees Wallace & Nurick LLC and in practicing real estate law and the knowledge he gained from his service as a director of Integrity qualify him to serve on the S&T Board and on the Compensation Committee and the Nominating Committee.
Board Recommendation
THE S&T BOARD RECOMMENDS A VOTE “FOR ALL” OF THE NOMINEES.
6 CORPORATE GOVERNANCE
Corporate Governance Guidelines
In 2014, the S&T Board adopted Corporate Governance Guidelines (“Guidelines”) which reflect S&T’s commitment to following corporate governance best practices. The Guidelines are to promote the functioning of the S&T Board and its committees and to set forth a common set of expectations as to how the S&T Board should perform its functions to enable effective corporate governance practices. These Guidelines are not intended to modify or amend S&T’s Articles of Incorporation, as amended, or By-laws. In the event of a discrepancy between these Guidelines and the Articles of Incorporation or the By-laws, the Articles of Incorporation and By-laws will always govern. The Guidelines are available on S&T’s website, www.stbancorp.com, under Corporate Governance.
Director Independence The S&T Board determines annually that a majority of directors serving on the S&T Board are independent as defined in
the NASDAQ listing standards. In 2015, the S&T Board also considered all direct and indirect transactions described in Statement Proxy “Transactions with Related Parties” and “Compensation Committee Interlocks and Insider Participation” in determining whether the director is independent. Finally, the S&T Board considered whether a director has any other material relationships with S&T and concluded that none of these directors has a relationship that impairs the director’s independence. There were no other related party transactions other than those described in the aforementioned sections of this Proxy Statement. The Nominating Committee has the delegated responsibility to evaluate each director’s qualifications for independence for the S&T Board and for the committees of the S&T Board. Following review of the objective measures, the Nominating Committee and S&T Board also consider on a subjective basis each director’s personal, familial and/or business relationships, regardless of dollar amount.
On March 21, 2016, the S&T Board determined the following ten directors are independent under the NASDAQ listing rules: Mr. Delaney, Mr. Donnelly, Mr. Gatti, Mr. Grube, Mr. Hostetter, Mr. Jones, Mr. Palermo, Ms. Toretti, Mr. Urtin and Mr. Weingarten. As discussed below, all members of the Compensation Committee and the Nominating Committee are independent under the NASDAQ rules. In addition, the S&T Board determined that each of the members of the Audit Committee is independent under applicable SEC and NASDAQ rules.
Board and Committee Meetings
The S&T Board has implemented a formal policy that strongly encourages director attendance at the annual meeting of shareholders. In 2015, all of S&T’s directors attended the annual meeting of shareholders. Independent members of the S&T Board meet at least twice per year in regularly scheduled executive sessions with an independent Chairman of the Board presiding over all executive sessions.
During 2015, the S&T Board held ten board meetings, with the following number of meetings held by the S&T Board committees: Audit, four; Compensation and Benefits, five; Credit Risk, four; Executive, two; Nominating and Corporate Governance, five; and Trust and Revenue Oversight, four. All directors attended at least 75% of the total number of meetings of the S&T Board and committees held during 2015.
Board Structure; Separate Roles of Chairman and Chief Executive Officer There are currently 14 directors comprising the S&T Board and will remain fixed at 14 following the Annual Meeting. The S&T Board has established six committees: Audit, Compensation and Benefits, Credit Risk, Executive, Nominating and Corporate Governance, and Trust and Revenue Oversight.
The S&T Board believes that, as part of our efforts to embrace and adopt good corporate governance practices, different individuals should hold the positions of Chairman of the Board and Chief Executive Officer (“CEO”) to aid in the S&T Board’s oversight of management. The S&T Board believes that separation of the roles of Chairman and CEO is the best governance model for S&T and its shareholders at this time. Under this model, our Chairman, a non-executive position, can devote his attention to assuring that S&T has the proper governance controls in place that the S&T Board is properly structured from the standpoints of membership, size and diversity, and that management has the support it needs from the S&T Board to carry out our strategic priorities. The CEO, relieved of the duties normally performed by the Chairman, is free to focus his entire attention on growing and strengthening the business.
7 The duties of the non-executive Chairman of the Board include:
• presiding over all meetings of the S&T Board; • preparing the agenda for S&T Board meetings with the Corporate Secretary and in consultation with the CEO and other members of the S&T Board; • ensuring the S&T Board fulfills its role in overseeing and monitoring management and operations of S&T and protecting the interests of S&T and its shareholders; • ensuring the S&T Board receives timely, accurate and complete information and the decision time necessary to make informed judgments; • assigning tasks to the appropriate committees of the S&T Board; • establishing a relationship of trust with the CEO, providing advice and counsel while respecting the executive responsibilities of the CEO; • promoting effective relationships and open communication, both inside and outside the boardroom, between senior management and the S&T Board; • communicating the S&T Board’s evaluation of the CEO’s annual performance together with the Compensation Committee Chairperson; and • presiding over all meetings of shareholders.
We believe that the S&T Board, the S&T Board committees as presently constituted and the leadership structure of the S&T Board enables the S&T Board to fulfill its role in overseeing and monitoring the management and operations of S&T and protecting the interests of S&T and its shareholders.
The S&T Board’s Role in Risk Oversight
Role of the S&T Board
The S&T Board oversees an enterprise-wide approach to risk management (“ERM”), designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and to enhance shareholder value. The S&T Board regularly discusses with our Chief Risk Officer (the “CRO”) our major risk exposures, their potential impact on S&T, and the steps we take to manage them. A fundamental part of risk management is not only understanding the risks a company faces in its current and future activities and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for a regional full-service financial institution, particularly as a result of recent legislative and regulatory changes. The S&T Board has ultimate responsibility for approving the risk appetite that is appropriate for S&T. The S&T Board delegates the authority and responsibility for defining the risk appetite and ensuring alignment with the strategic objectives to the management-level Enterprise Risk Management Committee (“Enterprise Risk Committee”). Under ERM, our business unit managers will identify and quantify the levels and types of inherent risk within their areas of responsibility, as well as consider the appropriateness of existing risk responses and controls for mitigating risks, based upon a standard definition of risk and risk mitigation established by the Enterprise Risk Committee. By utilizing a comprehensive and standardized view of the nature and level of risk to which we are exposed and the interaction of the various risk components identified in our ERM program, we are better able to assess and manage our risk and react to uncertainties.
Currently, the S&T Board administers its risk oversight function directly and through the Audit Committee, the Compensation Committee, the Credit Risk Committee, the Executive Committee, the Trust and Revenue Oversight Committee and the Enterprise Risk Committee (a management-level committee).
Pursuant to the terms of our Audit Committee charter, the CRO is accountable to both the Audit Committee and our CEO. The Audit Committee reviews and approves the appointment, replacement or dismissal of the CRO, and discusses the organizational structure and staffing regarding risk management, internal controls and regulatory compliance. In 2010, the Audit Committee engaged an independent consulting firm to provide a comprehensive approach to assisting the CRO in further developing an effective ERM process and environment that links corporate strategy and risk management. The independent consultant remains engaged in a co-sourcing arrangement to assist with the annual and quarterly ERM risk assessment process and to support the maintenance of a fully integrated ERM process. 8 The CRO, as the administrator of the ERM program, regularly meets with management, including the CEO, to discuss our various primary areas of risk identified as part of the ERM program, including credit matters and risks related to our loan and investment portfolios; liquidity and market risks; legal, regulatory and compliance risks; and operational, information technology, reputation and strategic risks. As necessary, the Audit Committee meets with the CRO to discuss and analyze risks to S&T without management present. The CRO makes a quarterly ERM presentation to the S&T Board and regularly reports on corporate governance, compliance and risk-related matters at other S&T Board meetings. The Audit Committee is also responsible for monitoring our compliance risk with respect to regulatory and legal matters, and focuses on financial risk, including internal controls. The Audit Committee annually reviews and evaluates our internal audit function, and meets with our Chief Audit Executive (“CAE”) to review and assess internal audit risks including executive sessions without management present.
Our Enterprise Risk Committee, which is comprised of members of our senior management, including the CRO, CEO, Chief Financial Officer, Chief Operating Officer, Chief Credit Officer, Chief Banking Officer, CAE, Chief Lending Officer and General Counsel, meets quarterly to discuss the risk exposures of the enterprise, reviews changes to those exposures based on internal and external events, takes action to manage and mitigate such risks, discusses significant policy changes Statement Proxy and new products/services, reviews ERM reports before presentation to the S&T Board and promotes proper risk management practices throughout S&T. A corporate policy approved by the S&T Board governs the Enterprise Risk Committee.
The Compensation Committee is responsible for assessing and mitigating risks associated with S&T’s compensation practices, both with respect to S&T’s Named Executive Officers (as further defined and described in the Compensation Discussion and Analysis section of this Proxy Statement) and its employees generally. The Compensation Committee reviews the incentive compensation arrangements for S&T’s Named Executive Officers with the CRO at least annually to discuss and evaluate the risk posed to S&T by its employee compensation plans and to ensure that the compensation arrangements do not encourage the Named Executive Officers to take unnecessary and excessive risks that threaten the value of S&T. The Compensation Committee meets quarterly or as often as it determines is necessary and appropriate.
Our Credit Risk Committee is responsible for reviewing the credit administration risk management practices and reporting; the performance of the independent loan review function and its assessment of the management of credit risk arising from the lending and lending related functions of S&T; the review of approved commercial loan proposals; credit policy approval; and providing guidance on pertinent credit risk matters including loan related strategies. The Credit Risk Committee meets quarterly or as often as it determines is necessary and appropriate.
Our Trust and Revenue Oversight Committee is responsible for the oversight of all trust activities consistent with the Federal Deposit Insurance Corporation’s Statement of Principles of Trust Department Management and the development and implementation of strategic and tactical initiatives in support of S&T’s revenue growth and shareholder value creation. The Trust and Revenue Oversight Committee meets quarterly or as often as it determines is necessary and appropriate.
The Executive Committee is responsible for coordinating S&T Board delegated risk oversight responsibilities across established S&T Board committees including monitoring industry developments and emerging risks and to exercise the authority to act on behalf of the S&T Board between meetings of the S&T Board to the fullest extent permitted by law. The Executive Committee meets at least annually or as often as it determines is necessary and appropriate.
Employee Compensation Policies and Managing Risk
We believe our approach to goal setting, setting of targets with payouts at multiple levels of performance, and evaluation of performance results assist in mitigating excessive risk-taking that could harm our value or reward poor judgment by our executives. We believe that several features of our compensation policies and programs reflect sound risk management practices, such as basing incentive awards on the achievement of a predetermined earnings per share (“EPS”) goal, an audited number, and the granting of restricted stock subject to a two or three year vesting that serves the additional purpose of encouraging senior management to make decisions currently that promote long-term growth and retention combined with stock ownership guidelines. All awards granted under the 2015 incentive plans were subject to Compensation Committee review and approval based upon corporate and/or individual performance. The incentive plan for senior management, as described in the Compensation Discussion and Analysis section below, contains a “Shareholder Protection Feature,” which provides that awards will not be made unless S&T maintains well capitalized capital ratio requirements, as established by applicable regulatory authorities. We believe we have allocated our compensation among base salary and short and long-term compensation target opportunities in such a way as to not encourage excessive risk-taking. The Compensation Committee 9 also reviews compensation and benefits plans affecting employees in addition to those applicable to executive officers. Based on the review by the Compensation Committee, the S&T Board determined that it is not reasonably likely that S&T’s compensation and benefit plans would have a material adverse effect on S&T.
Audit Committee The members of the Audit Committee are Jeffrey Grube, Jerry Hostetter, Frank Jones and Frank Palermo (Chairman). All members meet the independence standards for audit committees established by the SEC and NASDAQ. A written charter approved by the S&T Board governs the Audit Committee and includes the provisions required by the NASDAQ listing standards. A copy of the charter is included on S&T’s website www.stbancorp.com, under Corporate Governance. The Audit Committee has provided information regarding the functions performed by the Audit Committee and its membership in the “Report of the Audit Committee,” included in this Proxy Statement on page 45.
The S&T Board has determined that Mr. Palermo meets the qualifications of an audit committee financial expert under SEC regulations adopted under the Sarbanes-Oxley Act of 2002. Mr. Palermo is a Certified Public Accountant and Certified Valuation Analyst, with 37 years in public accounting, four years as a vice president and controller at a community bank and eight years as a director of a start-up community bank. This experience and education gives Mr. Palermo an understanding of U.S. generally accepted accounting principles and financial statements; the ability to assess general applications of such principles in connection with accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements presenting a breadth and level of complexity of accounting issues that are comparable to S&T’s financial statements; an understanding of internal control over financial reporting; and an understanding of audit committee functions. Mr. Palermo has been designated by the S&T Board as S&T’s “audit committee financial expert.”
Compensation and Benefits Committee
The members of the Compensation Committee are John Delaney, Michael Donnelly, Jeffrey Grube (Chairman), Jerry Hostetter, Frank Palermo and Steve Weingarten. The Compensation Committee’s function is to recommend to the S&T Board action on executive compensation and compensation and benefit changes brought to it by management. A written charter approved by the S&T Board governs the Compensation Committee. A copy of the charter is included on S&T’s website www.stbancorp.com, under Corporate Governance. The Compensation Committee is comprised entirely of independent board members, as defined by NASDAQ listing standards.
The Compensation Committee is responsible for our stated compensation strategies, goals and purposes, ensuring that there is a strong link between the economic interests of management and shareholders; that members of management are rewarded appropriately for their contributions to company growth and profitability; and that the executive compensation strategy supports organization objectives and shareholder interests. The Compensation Committee must provide clear direction to management to ensure that its policies and procedures are carried out in a manner that achieves balance and is consistent with safety and soundness. It approves any material exceptions or adjustments to the incentive compensation arrangements established for senior management, and carefully considers and monitors the effects of any approved exceptions or adjustments. It receives and reviews, on an annual or more frequent basis, an assessment by management, with appropriate input from risk management personnel, of the effectiveness of the design and operation of the organization’s incentive compensation system in providing appropriate risk-taking incentives. It also reviews periodic reports of incentive compensation awards and payments relative to risk outcomes. It ensures that the incentive compensation arrangements for S&T do not encourage employees to take risks that are beyond S&T’s ability to manage effectively. It also performs other related duties as defined in its written charter.
The process, policies and specific determinations of the Compensation Committee with respect to compensation of our Named Executive Officers for fiscal 2015 are described in greater detail in the Compensation Discussion and Analysis section of this Proxy Statement.
The Compensation and Benefits Committee Report is on page 33 of this Proxy Statement.
Nominating and Corporate Governance Committee
The members of the Nominating Committee are John Delaney, Michael Donnelly, Frank Jones (Chairman), Frank Palermo, Christine Toretti and Steve Weingarten. The Nominating Committee functions are to assist the S&T Board in reviewing the qualifications and independence of the members of the S&T Board and its various committees on a periodic basis as well as the composition of the S&T Board committees on a periodic basis and the composition of the S&T Board as a 10 whole; to oversee the evaluation of the performance of the S&T Board and its committees as a whole; to recommend director nominees to the S&T Board to submit for election by shareholders; and to provide guidance to the S&T Board on corporate governance issues. In addition, the Nominating Committee reviews all transactions with related parties, as further described on page 43 of this Proxy Statement. The Nominating Committee oversees the S&T Director Orientation Program and the continuing education programs for all directors. To assist in remaining current with their board duties and committee responsibilities, the S&T Board participates in the Bank Director’s Membership Program. This Program offers the directors access to the BankDirector.com online video training series, a wide range of in-person conferences, periodic hard copy and digital magazine, peer-based and webinar educational programs on corporate governance, committee duties, board leadership and industry developments.
A written charter approved by the S&T Board governs the Nominating Committee. A copy of the charter is included on S&T’s website www.stbancorp.com, under Corporate Governance. The Nominating Committee is comprised entirely of independent board members, as defined by NASDAQ listing standards.
Director Qualifications and Nominations; Board Diversity rx Statement Proxy
The Nominating Committee has adopted, and the S&T Board has ratified, a corporate policy for identifying and evaluating candidates for membership on the S&T Board. The Nominating Committee identifies potential candidates based on suggestions from directors, officers of S&T and S&T shareholders. The Nominating Committee will consider shareholder nominations for directors in accordance with the procedure set forth in Section 202 of S&T’s By-laws and applicable law. The procedure provides that a notice relating to the nomination must be timely given in writing to the Corporate Secretary of S&T, at 800 Philadelphia Street, Indiana, PA 15701, prior to the annual meeting. To be timely, the notice must be delivered not earlier than the close of business on the 120th day, nor later than the close of business on the 60th day, immediately preceding the annual meeting. Such notice must be accompanied by the nominee’s written consent to be named in the applicable proxy statement and contain information relating to the business experience and background of the nominee and the nominee’s holdings of S&T Common Stock and information with respect to the nominating shareholder. There are no differences in the manner in which the Nominating Committee evaluates candidates for membership on the S&T Board based on whether such candidate is recommended by a shareholder, the Nominating Committee, or by any other source.
In evaluating and selecting nominees to the S&T Board, the Nominating Committee takes into account all factors and criteria it considers appropriate, which includes but is not limited to the following: high personal and professional integrity; sound judgment and exceptional ability; business experience; area of residence in relationship to S&T’s geographic market; other directorship experience that would be beneficial to the S&T Board and management of S&T; diversity of experience relative to that of other S&T directors; diversity of age, gender, minority status and level and type of education; whether the candidate will be effective in serving the long-term interests of S&T’s shareholders; whether the candidate has sufficient time and energy to devote to the affairs of S&T; whether the candidate possesses a willingness to challenge and stimulate management and the ability to work as part of a team; whether the candidate meets the independence requirements of the NASDAQ listing standards; whether the candidate is free from conflicts of interest with S&T; and any other factors related to the ability and willingness of a new director to serve or an existing director to continue his or her service.
The Nominating Committee may engage a third party search firm to assist it in identifying director candidates, but the Nominating Committee did not do so in 2015. S&T did not receive any timely shareholder nominations for director for consideration for this Annual Meeting. Accordingly, S&T has not rejected or refused such candidates.
Shareholder Communications with Directors
Shareholders who desire to communicate with the S&T Board or a specific director should send any communication, in writing, to S&T Bancorp, Inc., 800 Philadelphia Street, Indiana, Pennsylvania 15701, ATTN: Corporate Secretary. Any such communication should state the number of shares beneficially owned by the shareholder. S&T’s Corporate Secretary will initially review all communications received in accordance with the Shareholders Communication Policy adopted by the S&T Board. The Corporate Secretary will relay all such communications to the appropriate director or directors on a periodic basis unless the Corporate Secretary determines that the communication does not relate to the business or affairs of S&T or the functioning or constitution of the S&T Board or any of its committees; relates to routine or insignificant matters that do not warrant the attention of the S&T Board; is an advertisement or other commercial solicitation or communication; is frivolous or offensive; or is otherwise not appropriate for delivery to directors. The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full S&T Board or one or more of its committees and whether any response to the person sending the 11 communication is appropriate. Any such response will be made through S&T’s management and only in accordance with S&T’s policies and procedures and applicable laws and regulations relating to the disclosure of information.
Code of Conduct and Ethics
The S&T Board has adopted a Code of Conduct for directors, officers and employees, which is posted on S&T’s website www.stbancorp.com, under Corporate Governance. The Code of Conduct addresses the professional, honest and candid conduct of each director, officer and employee; conflicts of interest, disclosure process, compliance with laws, rules and regulations (including insider trading laws); corporate opportunities, confidentiality and fair dealing; protection and proper use of company assets; and encourages the reporting of any illegal or unethical behavior. A waiver for an executive officer or director of S&T may be made only by the S&T Board and must be promptly disclosed as required by SEC or NASDAQ rules. S&T will disclose any such waivers, as well as any amendments to the Code of Conduct, on S&T’s website. Shareholders may obtain a printed copy of the Code of Conduct by contacting the Corporate Secretary at the address previously provided.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during 2015 were John Delaney, Michael Donnelly, Jeffrey Grube, Fred Morelli and Frank Palermo. During 2015 S&T Bank made the following payments to members of the Compensation Committee:
S&T Bank made payments of $266,773 for the purchase of printing services and promotional items from companies owned or controlled by Director Donnelly.
S&T Bank made aggregate payments of $157,678 for the purchase and maintenance of vehicles and the lease of a parking lot from companies owned or controlled by Director Delaney. The terms of the parking lot lease agreement provided for a monthly payment of $4,000 until April 30, 2010 with additional four successive renewal options of five years each and one successive renewal option of four years. S&T exercised the first option extending the lease from May 1, 2010 to April 30, 2015. We exercised our second option extending the lease another five years from May 1, 2015 to April 30, 2020. The monthly rental increased for each renewal term based on the CPI. Taxes, insurance, utilities and maintenance are the responsibility of the Lessee. The monthly payment for the months of January through April 2015 was $4,975 and from May through December 2015 was $5,970.
In addition, S&T Bank may make extensions of credit to members of the Compensation Committee in the ordinary course of business and on the same terms as available to other non-related parties. See “Transactions with Related Parties.”
No member of the Compensation Committee was at any time during fiscal 2015 an officer or employee of S&T or any of our subsidiaries, and no member has ever served as an executive officer of S&T. None of our executive officers serves or, during fiscal 2015, served as a member of the board of directors or the compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.
Compensation Consulting and Advisory Services Fees
In October 2013, the Compensation Committee engaged Aon Hewitt to review the draft of the S&T Bancorp, Inc. 2014 Incentive Plan (the “2014 Plan”), evaluate and benchmark compensation for the top 12 executive positions at S&T, review the S&T compensation peer group, and review and update the Management Incentive Plan (“MIP”) and Long-Term Incentive Plan (“LTIP”) for 2014. In March 2014, the Compensation Committee engaged Aon Hewitt to review the Compensation Discussion & Analysis for the proxy statement for the 2014 annual meeting of shareholders. Aon Hewitt was also engaged to review S&T’s change in control agreements with executives, including the Named Executive Officers, and to evaluate the feasibility of implementing an employee stock purchase plan. Aon Hewitt advised the Compensation Committee on the design of the 2015 MIP and 2015 LTIP.
12 The following shows the consulting fees paid by S&T to advisors to the Compensation Committee of the Board for the calendar year 2015:
Consulting fees for determining and recommending the amount or form of executive Additional services provided by Compensation Consultant compensation Compensation Consultant Aon Hewitt $3,441 $— rx Statement Proxy
13 DIRECTOR COMPENSATION
The Nominating Committee annually reviews the S&T director compensation. S&T’s director compensation is designed to align the S&T Board of directors with its shareholders and to attract, motivate and retain high performing members critical to our company’s success.
The following table provides information concerning compensation paid by S&T to its non-employee directors during 2015.
Director Compensation Table for Fiscal Year 2015
Fees Earned or All Other Paid in Cash Stock Awards Compensation Name ($) ($) (1)(2) ($) (3) Total ($) John J. Delaney 38,400 30,003 828 69,231 Michael J. Donnelly 38,200 30,003 828 69,031 William J. Gatti 42,300 30,003 828 73,131 James T. Gibson 35,967 34,515 475 70,957 Jeffrey D. Grube 43,000 30,003 828 73,831 Jerry D. Hostetter 35,067 34,515 475 70,057 Frank W. Jones 44,500 30,003 828 75,331 Joseph A. Kirk 13,100 0 415 13,515 David L. Krieger 33,900 30,003 828 64,731 James C. Miller 42,000 30,003 828 72,831 Fred J. Morelli, Jr. (4) 55,800 30,003 828 86,631 Frank J. Palermo, Jr 60,400 30,003 828 91,231 Christine J. Toretti 46,400 30,003 828 77,231 Charles G. Urtin 78,500 30,003 828 109,331 Steven J. Weingarten (5) 35,967 34,515 475 70,957
(1) The S&T Board awarded 1,117 restricted shares of Common Stock to each director on the S&T Board on May 20, 2015, with such shares vesting in full on May 19, 2016. An additional 168 restricted shares of Common Stock were awarded to Messrs. Gibson, Hostetter and Weingarten in recognition of the prorated portion of time serving on the S&T Board from the date of the Integrity merger on March 4, 2015 through May 20, 2015. The fair market value of the Common Stock granted on May 20, 2015 was $26.86 per share. The values for stock awards in this column represent the grant date fair value of the restricted shares granted in 2015, computed in accordance with FASB ASC Topic 718. Information about the assumptions used to value these awards can be found in Note 20 “Incentive and Restricted Stock Plan and Dividend Reinvestment Plan” in our Annual Report on Form 10-K for the year ended December 31, 2015. This column includes the value of these stock awards, all of which were issued under the 2014 Plan. (2) As of December 31, 2015, each director had restricted stock awards of 1,117 shares except for Mr. Kirk, who retired from the S&T Board effective May 20, 2015, and Messrs. Gibson, Hostetter and Weingarten (McNees Wallace & Nurick), who had 1,285 shares. (3) Each director was paid quarterly dividends for their restricted shares of Common Stock. (4) Mr. Morelli passed away in December 2015. Under the terms of the Plan Document, his outstanding restricted shares will continue to vest until May 19, 2016, at which time, the shares will transfer to his estate. (5) As a partner in McNees Wallace & Nurick, Mr. Weingarten is required by the firm's policy to have his director compensation, including shares of Common Stock, paid to McNees Wallace & Nurick. Therefore, all compensation, except for an initial cash payment of $6,367, reported as earned by Mr. Weingarten in the table was paid to McNees Wallace & Nurick.
14 Directors Compensation
Employee members of the S&T Board receive no additional compensation for participation on the S&T Board. In 2015, our non-employee directors received compensation for attending board and committee meetings, or training sessions, in the amounts described below.
Directors Annual Cash Retainer $25,000 Stock Award (1) 30,003 Board Committee Fee (except Audit) 900 Audit Committee Fee 1,200 Board Committee and Audit Committee Fee (phone) 500 Training/Seminar Fee 1,000
Committee Chairperson Retainer Fee rx Statement Proxy Chairman Retainer $30,000 Vice Chairman Retainer 10,000 Audit 15,000 Audit Committee Financial Expert 10,000 Compensation and Benefits 7,500 Credit Risk 7,500 Nominating and Corporate Governance 7,500 Trust and Revenue Oversight 7,500
(1) The number of shares granted is based on the fair market value of the Common Stock on the date of grant. The S&T Board awarded 1,117 restricted shares of Common Stock on May 20, 2015 with 100% vesting on May 19, 2016. The fair market value of Common Stock on May 20, 2015 was $26.86 per share. An additional 168 restricted shares of Common Stock were awarded to Messrs. Gibson, Hostetter and Weingarten in recognition of the prorated portion of time serving on the S&T Board from the date of the Integrity Bancshares merger on March 4, 2015 through May 20, 2015.
15 PROPOSAL 2: RATIFICATION OF THE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2016
The Audit Committee of the S&T Board appointed the firm of KPMG LLP, independent registered public accounting firm, to audit and report on S&T’s financial statements for the fiscal year ending December 31, 2016. Action by shareholders is not required by law in the appointment of independent accountants. However, the S&T Board considers this selection to be an important issue and, therefore, is submitting the selection of KPMG LLP for ratification by the shareholders. If the shareholders do not ratify this selection, the selection will be reconsidered by the Audit Committee.
KPMG LLP has no direct or indirect financial interest in S&T or in any of its subsidiaries, nor has it had any connection with S&T or any of its subsidiaries in the capacity of promoter, underwriter, voting trustee, director, officer or employee. Representatives of KPMG LLP will be present at the Annual Meeting and will be afforded an opportunity to make a statement if they desire to do so. It is also expected they will be available to respond to appropriate questions.
Fees Paid to Independent Registered Public Accounting Firm
During the fiscal years ended December 31, 2015 and December 31, 2014, KPMG LLP served as S&T’s independent registered public accounting firm (“Independent Accountants”).
Fees for professional services provided by our Independent Accountants in each of the last two fiscal years in each of the following categories are:
2015 2014 Audit Fees $939,862 $800,580 Audit-Related Fees 0 5,350 Tax Fees 00 All Other Fees 1,650 1,650 $941,512 $807,580
“Audit Fees” includes fees for audit services associated with the annual audit, the reviews of S&T’s quarterly reports on Form 10-Q, accounting, consultations and SEC registration statements. The 2015 and 2014 fees include services rendered in connection with S&T's acquisition of Integrity, such as assistance with and consent to the Form S-4 registration statement and other acquisition related costs. The 2015 fees also include assistance with and consent to the Form S-3 shelf registration statement.
The 2014 “Audit-Related Fees” includes fees billed for a student lending audit. “All Other Fees” for 2015 and 2014 represents subscription fees for an accounting and auditing research tool. All 2015 and 2014 fees were paid to KPMG LLP.
Pre-Approval Policies and Procedures
The Audit Committee is responsible for the approval of all services performed by the Independent Accountants. All services provided by the Independent Accountants in 2015 were pre-approved by the Audit Committee. The Audit Committee is required to pre-approve all audit and non-audit services performed by the Independent Accountants to assure that the provision of such services does not impair the Independent Accountant’s independence. In addition, any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee. The Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated will report any pre-approval decisions to the Audit Committee at its next scheduled meeting for ratification. The Audit Committee does not delegate its responsibilities to pre-approve services performed by the Independent Accountants to management.
Board Recommendation
THE S&T BOARD RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE SELECTION OF KPMG LLP AS AN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2016.
16 PROPOSAL 3: ADVISORY VOTE ON S&T’S EXECUTIVE COMPENSATION
S&T believes that our overall executive compensation program, as described in the Compensation Discussion and Analysis (the “CD&A”) elsewhere in this Proxy Statement, is designed to pay for performance and directly aligns the interest of our executive officers with the long-term interests of our shareholders.
The Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) enables our shareholders to vote to approve, on a non-binding basis, the compensation of our Named Executive Officers (“NEOs”) as disclosed in this Proxy Statement in accordance with the SEC’s rules. This vote is not intended to address any specific item of compensation or the compensation of any particular officer, but rather the overall compensation of our NEOs and our compensation philosophy, policies and practices. Previously, pursuant to the Dodd-Frank Act, the S&T Board recommended, and the shareholders subsequently approved, that this advisory proposal be submitted to shareholders annually.
Accordingly, S&T is presenting the following advisory proposal, commonly known as the “say-on-pay proposal,” for shareholder approval: rx Statement Proxy “Resolved, that the shareholders hereby approve the compensation of our Named Executive Officers as reflected in this Proxy Statement and as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, which disclosure includes the compensation discussion and analysis, the compensation tables and all related material.”
Because your vote is advisory, it will not be binding upon the S&T Board. In the event this non-binding proposal is not approved by our shareholders, then such a vote shall neither be construed as overruling a decision by the S&T Board or the Compensation Committee, nor create or imply any additional fiduciary duty by the S&T Board or our Compensation Committee, nor further shall such a vote be construed to restrict or limit the ability of our shareholders to make proposals for inclusion in proxy materials related to executive compensation. Notwithstanding the foregoing, the S&T Board and the Compensation Committee will consider the non-binding vote of our shareholders on this proposal when reviewing compensation policies and practices in the future.
Board Recommendation
THE S&T BOARD RECOMMENDS A VOTE “FOR” APPROVAL OF THIS ADVISORY PROPOSAL ON EXECUTIVE COMPENSATION.
17 EXECUTIVE OFFICERS OF THE REGISTRANT
As of April 6, 2016, the executive officers of S&T are:
Officer of Named Executiv Corporation e Officer Age Principal Occupation During Past 5 Years Since Todd D. Brice 53 President and Chief Executive Officer of S&T and S&T Bank, since April 2008. 2002
Mark Kochvar 55 Senior Executive Vice President and Chief Financial Officer, since February 2010. 2008
David G. Antolik 49 Senior Executive Vice President, Chief Lending Officer, since January 2008. 2004
George Basara 57 Executive Vice President, General Counsel and Human Resources Director, since January 2015; 2015 Prior to joining S&T, Shareholder of Buchanan Ingersoll & Rooney PC, from September 1995 to December 2014. Ernest J. Draganza 51 Senior Executive Vice President, Chief Risk Officer and Secretary, since January 2012; Executive 2010 Vice President, Chief Risk Officer and Secretary, from February 2010 to December 2011. Patrick J. Haberfield 49 Senior Executive Vice President, Chief Credit Officer, since July 2013; Executive Vice President, 2010 Chief Credit Officer, from May 2010 to June 2013. Melanie A. Lazzari 36 Senior Vice President, Controller, since February 2010. 2015 David P. Ruddock 54 Senior Executive Vice President, Chief Operating Officer, since April 2013; Senior Executive Vice 2004 President, Chief Administrative Officer for Market Sales, Bank Operations and Corporate Technology from January 2011 to March 2013. Thomas J. Sposito, II 53 Senior Executive Vice President since March 2015; Executive Vice President of Integrity Bank from 2015 September 2012 to March 2015. Previously served as Integrity Bank Chief Operating Officer and Chief Revenue Officer. Prior to joining Integrity Bank, Executive Vice President, Central Pennsylvania Market Manager for PNC Bank, N.A., from 2007 to 2012. Rebecca A. Stapleton 53 Senior Executive Vice President, Chief Banking Officer, since June 2014; Executive Vice President, 2012 Human Resources and Employee Communications, from January 2012 to May 2014; Senior Vice President, Employee Services Manager, from January 2009 to December 2011.
18 COMPENSATION DISCUSSION AND ANALYSIS
This section of the Proxy Statement is divided into the following sections:
• Introduction • Executive Summary • Say on Pay and Shareholder Engagement • Overview of the Compensation Program for Named Executive Officers • Components of the Compensation Program Base Salary Management Incentive Awards
Long-Term Incentive Plan Statement Proxy Certain Other Benefits • Process for Determining Named Executive Officer Compensation • Pay for Performance • 2015 Named Executive Officer Compensation Decisions and Performance Considerations • Change in Control • Other Compensation-Related Provisions • Effect of Taxation on Compensation Programs • Compensation and Benefits Committee Report
INTRODUCTION
As the Compensation and Benefits Committee (the “Compensation Committee”), we provide the following overview of S&T’s executive compensation principles, specific executive compensation programs and pay decisions that we have made in 2015 and early 2016. In addition, we describe the process that we oversee and in which we participate to arrive at specific compensation policies and decisions involving program design and pay for S&T’s Named Executive Officers (“NEOs”), who are listed below.
Name Title Todd Brice President and Chief Executive Officer Mark Kochvar Senior Executive Vice President and Chief Financial Officer David Antolik Senior Executive Vice President and Chief Lending Officer David Ruddock Senior Executive Vice President and Chief Operating Officer Ernest Draganza Senior Executive Vice President and Chief Risk Officer David Richards (1) Executive Vice President and Market Executive
(1) Mr. Richards was an executive officer of the Company until November 16, 2015, at which time the S&T Board reassessed the officers defined as executive officers for S&T. Mr. Richards would have been an NEO in 2015, except for the S&T Board’s change in designation of its executive officers.
19 EXECUTIVE SUMMARY
S&T experienced a year of strong performance in 2015:
• Net income improved to a record $67.1 million, an increase of 15.8% compared to 2014. • Return on average assets was 1.13% and return on average equity was 8.94%. • Net loan charge-offs remained historically low at 0.22% of average loans. • Assets now exceed $6.3 billion.
S&T also extended its footprint through acquisition and expansion resulting in total loan growth of $1.2 billion, including $370 million through organic growth and $789 million through acquisition of Integrity, which closed on March 4, 2015.
As disclosed in the Compensation Discussion and Analysis section from the proxy statement for the 2015 Annual Shareholders Meeting, we evaluated and approved the following pay adjustments and awards for NEOs for 2015:
• Average salary increase of 6.9%. • An annual cash incentive award with a target of 35% and 30% of base salary for the CEO and the other NEOs, respectively, under the terms of the 2015 Management Incentive Plan (“2015 MIP”). • A long-term incentive award with a target of 40% and 35% of base salary for the CEO and the other NEOs, respectively, granted in the form of time and performance-based restricted shares under the terms of the 2015 Long-Term Incentive Plan (“2015 LTIP”).
For 2016, we evaluated and approved the following pay adjustments for the NEOs:
• Average salary increase of 3.9%. • An annual incentive award with a target of 35% and 30% of base salary for the CEO and the other NEOs, respectively, under the terms of the 2016 Management Incentive Plan (“2016 MIP”). • A long-term incentive award with a target of 40% and 35% of base salary for the CEO and the other NEOs, respectively, granted in the form of time and performance-based restricted shares under the terms of the 2016 Long-Term Incentive Plan (“2016 LTIP”).
SAY ON PAY AND SHAREHOLDER ENGAGEMENT
S&T is required to provide a separate non-binding shareholder advisory vote on the compensation of S&T’s executive officers. At the 2015 Annual Shareholder Meeting, the holders of 21,986,000 shares of Common Stock, or 93.39% of the shares voting on the proposal, voted to approve the non-binding, advisory proposal on the compensation of S&T’s executive officers. Because not all shareholders voted their shares, this amounted to 63.1% of the then outstanding shares of Common Stock.
The vote reflects support for S&T’s executive compensation policies and practices among shareholders. As a consequence, the Compensation Committee expects to continue to adhere to the compensation policies, principles and programs described below in future years.
20 OVERVIEW OF THE COMPENSATION PROGRAM FOR NAMED EXECUTIVE OFFICERS
S&T designs its management compensation programs to optimize their alignment with S&T’s strategic direction and business environment within which it must create value for shareholders. The primary program objectives have been and continue to be as follows:
• The pay package is structured to cost efficiently attract, retain and reinforce engagement among the leadership team and S&T key contributors; • Compensation programs are aligned with shareholder interests for an appropriate balance between risk and reward; • Both individual plan features and the overall pay program are built on principles of sound risk management and effective controls critical to successful navigation of an uncertain environment for financial services companies; and
• Reward programs are designed to emphasize adherence to strong pay for performance principles. Statement Proxy
The Compensation Committee continues to support a pay program with four major program components to help guide compensation decisions:
• Base Salary: A base salary position near the median of relevant competitive practices (i.e., calibrated to be consistent with base salary levels for comparable positions in other similar enterprises of similar scope). • Management Incentive Plan (“MIP”): An annual incentive plan with an incentive opportunity that is moderate relative to competitive practices for similar positions at potential competitors for talent. Target annual incentives should drive desired positioning for total compensation to the middle of the market. • Long-Term Incentive Plan (“LTIP”): A long-term incentive program that serves two purposes: (1) to help ensure leadership retention and management continuity as S&T continues to execute its longer-term strategic plan; and (2) to reward management for strong sustained value creation and financial performance. • Supplemental Benefits: Limited additional supplemental benefits that are either consistent with those provided to other employees, or directly created to reinforce a singular commitment from the management team to S&T and its business imperatives.
The Compensation Committee considers overall corporate performance as well as individual initiative and achievements when reviewing and approving all compensation decisions relating to S&T’s NEOs: the CEO, the CFO and the other executive officers named in the Summary Compensation Table. The policy of the Compensation Committee is to provide compensation that is competitive within the banking industry of financial institutions of similar size and product offerings.
The Compensation Committee is actively involved in the oversight of not only NEO compensation but all remuneration programs that have a material cost profile, that could materially affect S&T’s risk profile or influence the focus of key contributors on achievement of strategic and tactical objectives.
For NEOs, the Compensation Committee reviews a number of analyses of compensation practices to help facilitate its executive compensation decisions. These include:
• Pay mix representing the effectiveness of balancing long-term versus short-term performance imperatives; • Wealth accumulation opportunities in light of existing programs and outstanding rewards; • Current pay relative to peer group practices; • Selective review of compensation data for positions of similar scope and focus; and • Detailed formal review of overall performance and specific performance contributions made to S&T by each NEO.
21 Total Direct Compensation Position
S&T’s target pay mix is built on competitive base salaries, with generally moderate annual and long-term incentive targets. The moderate positioning of annual incentives and long-term incentives reflects our commitment to introducing pay program modifications that are both sensitive to S&T Bank’s proactive risk management culture while, at the same time, responding appropriately to the importance of retaining a strong and committed leadership team at S&T Bank. The Compensation Committee reviews this posture periodically with the help of outside advisors, and continues to believe that the opportunities provided under the incentive plans reflect an appropriate balance between risk and reward, and provide sufficient incentives to align management to achieving S&T’s short-term and longer-term objectives.
COMPONENTS OF THE COMPENSATION PROGRAM
Base Salary
The purpose of base salary is to provide competitive and fair base compensation that recognizes the executives’ roles, responsibilities, contributions, experiences and performance. Base salary represents a fixed and guaranteed element of compensation that reflects executives’ long-term performance and market pay level for the role. S&T’s base salary policy targets the median of relevant competitive practices. Relevant competitive practices are determined using both a proprietary survey of pay practices at community and regional banks similar in size and scope to S&T and an examination of Peer Bank executive pay practices. The Peer Banks are listed on page 27 of this Compensation Discussion and Analysis (“CD&A”). The Compensation Committee sets each executive’s individual pay annually to reflect individual experiences, expertise, performance and contributions in the role. As such, actual base salaries range above and below the median of relevant competitive practices in recognition of these factors, including tenure in role, historical performance and specific bank needs.
Management Incentive Awards
The purpose of the MIP is to align management’s interests to the achievement of S&T’s financial, operational and strategic objectives for the year. The MIP provides senior management with an annual cash incentive opportunity designed to: (i) create focus on specific planned performance goals, (ii) deliver a portion of a competitive pay package in a form that is not fixed but varies in relation to the performance of S&T and (iii) serve as a vehicle for recruitment and retention.
For 2015, we adopted the 2015 MIP, with the following features:
• The target annual incentive payout was 35% and 30% of base salary for the CEO and the other NEOs, respectively. • The incentive payout was 23% and 20% of base salary for the CEO and the other NEOs, respectively. • 70% of each participant’s award was earned based on corporate results, and 30% was based on performance relative to individual/unit goals. • Corporate results were determined based on EPS and Deposit Growth (defined as the total net increase in nonbroker deposits in the plan year). • Each participant had multiple individual goals against which individual performance is evaluated. The framework for establishing these goals was based largely on execution of elements of S&T’s strategic plan, including activities centered around multi-faceted growth, profit improvement, operational effectiveness, corporate culture, effective brand and enterprise risk management (i.e., balanced risk and reward).
The formula used to determine awards is defined as follows:
Target Incentive S&T's Financial Award Calendar Year Opportunity as a Results To Goals Individual Objectives Earned = Base Salary × % of Salary × Performance Factor + Performance Factor
22 The corporate performance measures for 2015, EPS and Deposit Growth, were each assigned specific weighting factors, and actual earnings opportunities were based on the Performance Level actually achieved relative to the performance ranges shown in the table below:
Payout Level Performance Level Percentage Below Threshold 0% of Allocated Target Threshold 25% of Allocated Target Target 100% of Allocated Target Distinguished 150% of Allocated Target
• Allocated Target equals the participant’s MIP incentive target multiplied by the weighting for each performance category (i.e., 60% for EPS, 10% for customer deposit growth, and 30% for individual objectives.)
• The Deposit Growth Performance Measure is an “all-or-nothing” performance standard in which 100% of the Statement Proxy Allocated Target is earned only if the Target Performance Level is met. • The Payout Level Percentages relating to the EPS Performance Measure vary depending on Actual Performance, and its payout curve rises continuously from Threshold to Target and from Target to Distinguished. Therefore, to determine awards between Threshold and Target and Target and Distinguished, linear interpolation would be utilized.
To further strengthen the linkage between the MIP award, risk management and shareholder value creation, the MIP contains a “Shareholder Protection Feature” in which payouts will not occur for any plan year if S&T falls below “well capitalized” capital ratio requirements established by regulatory authorities, determined as of and up to the date that any payment would ordinarily occur pursuant to the MIP’s provisions. In addition to the Shareholder Protection Feature of the MIP, the MIP is operational only if S&T achieves Return on Average Equity (“ROAE”) for the plan year of at least 5% (the “Minimum Gateway Requirement”). The Compensation Committee believes that these features, coupled with the clawback requirements and the use of multiple performance measures, provide for substantial protection against excessive or unnecessary risk-taking by any plan participant.
The Compensation Committee has approved the 2016 MIP, which has similar provisions to the 2015 MIP. The corporate performance measures are each assigned specific weighting factors, and actual payouts will be based on the Performance Level actually achieved as follows:
Payout Level Performance Level Percentage Below Threshold 0% of Allocated Target Threshold 25% of Allocated Target Target 100% of Allocated Target Distinguished 150% of Allocated Target
• Allocated Target equals the participant’s MIP incentive target multiplied by the weighting for each performance category (i.e., 60% for EPS, 10% for Deposit Growth, and 30% for individual objectives.) • The Deposit Growth Performance Measure is an “all-or-nothing” performance standard in which 100% of the Allocated Target is earned only if the Target Performance Level is met. • The Payout Level Percentages relating to the EPS Performance Measure vary depending on Actual Performance, and its payout curve rises continuously from Threshold to Target and from Target to Distinguished. Therefore, to determine awards between Threshold and Target and Target and Distinguished, linear interpolation would be utilized.
23 Award opportunities for 2016 for the NEOs are shown in the table below and reflect the amount payable to NEOs if S&T were to achieve target financial results and the NEOs achieve 100% of their individual objectives for 2016.
MIP Target % of MIP Target $ of Named Executive Officer Base Salary Base Salary Todd Brice, President, President and Chief Executive Officer 35% $213,500 Mark Kochvar, Senior Executive Vice President and Chief Financial Officer 30% 98,250 David Antolik, Senior Executive Vice President and Chief Lending Officer 30% 108,300 David Ruddock, Senior Executive Vice President and Chief Operating Officer 30% 92,500 Ernest Draganza, Senior Executive Vice President and Chief Risk Officer 30% 90,510 David Richards, Executive Vice President and Market Executive (1) N/A N/A
(1) Mr. Richards participates in the State College Market Growth Incentive Plan (the "State College Plan") in lieu of the MIP. The objective of the State College Plan is to grow the lending portfolio in the State College, PA market and to recruit a banking team to service that market. Payment is based on the outstanding loan balance portfolio developed by the participant over six month intervals. All payouts are subject to senior management approval and are capped at pre-established amounts. Also, in 2016, Mr. Richards will not be an NEO because he is not an executive of S&T.
Long-Term Incentive Plan
The LTIP is designed to: (i) create focus on specific long-term goals aligned with shareholder interests, (ii) deliver a portion of a competitive pay package in a form that is not fixed but varies in relation to the long-term performance of S&T and (iii) serve as a vehicle for recruitment and retention.
The 2015 LTIP included the following features:
• The target incentive payout was 40% and 35% of base salary for the CEO and other NEOs, respectively. • The incentive payout is denominated in restricted stock by dividing the target incentive by a grant date share value. • One half of the shares will be earned based on remaining with S&T for three years (time-based restricted share awards vest on the second and third anniversaries of their grant date). • The other half will be earned based on performance relative to the Peer Banks and is referred to as the Performance-Based Restricted Share (“PBRS”) Target. • The number of PBRSs earned may rise to 150% of the PBRSs originally granted to a participant if Return on Average Equity performance is at the “distinguished” level (see below) and Total Shareholder Return is above half the Peer Banks. The number of PBRSs can fall to zero shares if performance is below the threshold level. If the number of shares earned exceeds the number of PBRSs issued to a participant (because performance is above target) S&T issues additional unrestricted shares upon vesting so that the participant receives the full number of shares earned.
The 2015 LTIP contains the same Shareholder Protection Feature and Minimum Gateway Requirement as described earlier for the 2015 MIP. The Compensation Committee believes that these features, coupled with the restricted stock and clawback requirements, provide for substantial protection against excessive or unnecessary risk-taking by any plan participant. The 2015 LTIP puts a greater focus on performance and serves to create a balance between long-term and short- term performance imperatives, beyond that offered by the annual cash incentive under the MIP.
24 Two metrics are used to determine the percentage of the PBRS Target earned through vesting of the PBRS awards (also referred to as performance shares):
(1) Return on Average Equity (“ROAE”) for 2015 through 2017 relative to Peer Banks
Participants can earn from 0% to 120% of their PBRS Target based on this metric as summarized below:
ROAE for 3-year Performance Period Vesting Performance Level Relative to Peer Banks Percentage (a) Below Threshold Below the 40 th percentile of the Peer Banks 0% of Target Threshold 40 th percentile of the Peer Banks 25% of Target Target 60 th percentile of the Peer Banks 100% of Target Distinguished 75 th percentile of the Peer Banks 120% of Target
(a)The Vesting Percentage for ROAE will vary depending on actual performance. The payout curve rises continuously from Threshold to Target and from
Target to Distinguished. Therefore, to determine awards between Threshold and Target and Target and Distinguished, linear interpolation would be Statement Proxy utilized.
(2) Cumulative Total Shareholder Return for 2015 through 2017 relative to Peer Banks
Participants can earn an additional 30% of their PBRS Target if S&T’s cumulative Total Shareholder Return (“TSR”) for the three year performance period exceeds the cumulative TSR for more than half of S&T’s peers (i.e. exceeds 50th percentile of the Peer Banks).
The Compensation Committee has approved the 2016 LTIP, which has similar provisions to the 2015 LTIP, and has a three-year performance period of January 1, 2016 through December 31, 2018.
Certain Other Benefits
S&T provides other benefits, or perquisites, to the NEOs that are comparable to the other benefits provided at the Peer Banks. The Compensation Committee believes that perquisites should be appropriately limited in scope and value. The primary perquisites for the NEOs are the company contributions to a qualified defined contribution plan and a nonqualified deferred compensation plan, a defined benefit program, a company car or car allowance, payment of the initiation fees and dues for social or country club memberships and a welfare benefit plan.
S&T maintains the Thrift Plan for Employees of S&T Bank (the “Thrift Plan”), which is a qualified defined contribution plan. All employees may participate in the Thrift Plan with elective salary deferrals, or 401(k) contributions. During 2015, S&T made matching contributions equal to 100% of the first 1% of the employees’ eligible compensation and 50% of the next 5% of the employees’ eligible compensation, up to a maximum of 3.5% of the employees’ eligible compensation. S&T considers the matching contributions to the Thrift Plan as an important incentive for employees to contribute toward their own retirement savings. In 2015, S&T made the following matching contributions to the Thrift Plan for each NEO: Mr. Brice, $9,275; Mr. Kochvar, $8,400; Mr. Antolik, $6,300; Mr. Ruddock, $9,275; Mr. Draganza, $8,400 and Mr. Richards, $9,275.
S&T established the S&T Bancorp, Inc. Supplemental Savings and Make-Up Plan (the “Nonqualified Plan”) in 1995 in order to provide certain management employees, including executives, the ability to make up for certain benefits that would normally be provided under S&T’s qualified plans except for federal tax laws setting annual compensation limits for qualified plans and additional limitations related to highly-compensated employees. The Nonqualified Plan was amended for compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations and other guidance promulgated thereunder (“Section 409A”) in December 2008, and again in 2012 to allow for employer discretionary contributions. S&T makes employer contributions to this plan that cannot be made to the qualified plans due to the aforementioned limits. During 2015, S&T contributed to the Nonqualified Plan for Mr. Brice $16,358; Mr. Kochvar, $0; Mr. Antolik, $9,902; Mr. Ruddock, $0; Mr. Draganza, $0, and Mr. Richards, $250,000. The contribution to Mr. Richards was a discretionary contribution which is scheduled to vest 50% upon completion of his fifth year of service and 10% annually after completion of each of the next five years.
S&T maintains a defined benefit pension program for eligible employees hired before January 1, 2008, including NEOs hired before that date. The NEOs’ defined benefit pension benefit is determined from two sources: (1) the qualified defined benefit retirement plan; and (2) a nonqualified supplemental plan. The benefits provided under these two sources are described beginning on page 39 of this Proxy Statement. The value of such defined benefit pension benefits changes as 25 compensation, service length, discount rate and mortality assumptions change. Consequently, the value credited to each NEO in the Summary Compensation Table on page 35 of this Proxy Statement as Change in Pension Value is a function of a number of assumptions required to calculate the present value of benefits. The present value of the pension can change without the accrual of additional benefits to the NEO, but as a result of a change in interest rates. More specifically, in 2013, interest rates rose, resulting in a negative Change in Pension Value for the NEOs, except for Mr. Kochvar who had a $16,200 Change in Pension Value due to his compensation increases over the past five years. A negative Change in Pension Value is treated as a zero change for purposes of the Summary Compensation Table. For 2014, 49.5% of the increase in the Change in Pension Value amount shown in the Summary Compensation Table is attributable to a 75 basis point decrease in interest rates. For 2015, the increase was primarily due to the accrual of additional service and increases in compensation. This increase was partially offset by a 25 basis point increase in interest rates.
S&T’s executives frequently drive vehicles on company business. Therefore, S&T provides either a company car or a car allowance to executives. Executives are responsible for reporting the amount of personal use of company cars to S&T, so that the taxable income from such use can be reported in the executives’ compensation. Executives who do not have a company car receive an annual car allowance of $6,000 or $7,200, depending upon the frequency that the executive drives. The car allowance is fully taxable compensation.
S&T pays for certain members of senior management to belong to one or more private clubs, if the member of management has significant customer contact and involvement in the community. S&T considers a social or country club to be an appropriate venue to entertain customers and to participate in various community functions. Expenses of a personal nature or related to a spouse are not paid by S&T.
Other benefits generally provided to all officers and full-time employees include the S&T Bank Welfare Benefit Plan. This plan has provisions for medical reimbursement, dental coverage, vision care coverage, long-term disability income, a flexible spending account, a health savings account and life insurance. If S&T hires or initiates a transfer of an employee, including an NEO, with special skills and requires a relocation of more than 35 miles, the employee may be eligible for reimbursement of the costs of house hunting trips, closing on the sale of the old home and the purchase of the new home, temporary living quarters and moving household goods and furniture. In these circumstances S&T will also gross up taxable relocation reimbursements for federal taxes.
PROCESS FOR DETERMINING NAMED EXECUTIVE OFFICER COMPENSATION
Compensation Approval Process
Executive compensation decisions are made by the Compensation Committee. Each member of the Compensation Committee is a non-employee director and qualifies as an independent director under the NASDAQ listing standards. The Compensation Committee independently decides the compensation that S&T will pay the CEO. For the remaining executive officers, the CEO makes recommendations to the Compensation Committee, which reviews, approves or adjusts the recommendations. The Compensation Committee meets in an executive session to discuss and finalize its decisions regarding the CEO’s compensation. The S&T Board reviews all decisions relating to the compensation of executive officers, except for decisions about awards under the S&T Bancorp, Inc. 2014 Incentive Plan (the “2014 Plan”), the MIP and the LTIP, which are made solely by the Compensation Committee with input from the CEO on all other NEOs. The Compensation Committee may delegate to its chairperson such power and authority as the Compensation Committee deems to be appropriate, except such powers and authorities required by law or regulation to be exercised by the whole Compensation Committee or a subcommittee of at least two members.
The Compensation Committee operates under a written charter approved by the S&T Board, which it reviews, modifies as necessary and reaffirms on an annual basis. The Compensation Committee charter is available in the Corporate Governance section of our website at: www.stbancorp.com.
Role of the Executive Compensation Advisor to the Compensation and Benefits Committee
During 2014 and early 2015, the Compensation Committee engaged Aon Hewitt to serve as an advisor to the Compensation Committee for executive compensation, including compensation of the NEOs. The Compensation Committee has monitored the relationship with Aon Hewitt carefully and has determined that the advice provided on NEO pay meets the highest standards of internal and external defensibility for such advice and that Aon Hewitt is independent and that there were no conflicts of interest resulting from retaining Aon Hewitt for such engagement. In reaching these conclusions, the Compensation Committee considered the factors set forth in both SEC rules and NASDAQ listing standards. 26 Role of Management (CEO)
The Compensation Committee reviews and approves the salary of Mr. Brice, the President and Chief Executive Officer, annually. The salaries for the other NEOs are reviewed by Mr. Brice, and are presented for approval to the Compensation Committee on an annual basis, typically in December. For 2013, 2014 and 2015, the Compensation Committee accepted the CEO’s salary recommendation for executives, including the NEOs.
Use of Competitive Data
The Compensation Committee reviews comparisons of the compensation programs established by peer banks for executives having similar responsibilities to S&T’s executives to establish competitive benchmarks for S&T’s compensation program. Aon Hewitt prepared the comparisons for 2013 and 2014, respectively. The Compensation Committee retained the same peers in 2015 as in 2014, due to its consideration that the peer banks continued to be appropriate. The peer banks are based on similar size and scope to S&T, operating both inside and outside S&T’s geographic market, and include the following banks for pay comparison purposes (collectively, the “Peer Banks”): Statement Proxy
• 1st Source Corporation • Independent Bank Corporation • BancFirst Corporation • NBT Bancorp, Inc. • Berkshire Hills Bancorp, Inc. • Peoples Bancorp, Inc. • Chemical Financial Corporation • Renasant Corporation • City Holding Company • Sandy Spring Bancorp, Inc. • Community Bank System, Inc. • Univest Corporation of Pennsylvania • First Busey Corporation • Union First Market Bankshares • First Commonwealth Financial Corporation • WesBanco, Inc. • First Merchants Corporation • WSFS Financial Corporation
For 2013, F.N.B. Corporation was included in the Peer Group, but was excluded for 2014 and 2015 due to its larger asset size.
PAY FOR PERFORMANCE
Pay for Performance Alignment
As described in the preceding discussions of the MIP and LTIP, the Compensation Committee approved incentive opportunities under the MIP and the LTIP for executives in 2015. The executives also continued to have opportunities to benefit from corporate financial performance through performance-based restricted stock awards under the 2014 LTIP.
2015 NAMED EXECUTIVE OFFICER COMPENSATION DECISIONS AND PERFORMANCE CONSIDERATIONS
The following summarizes the pay actions and decisions made for 2015 for each component of pay for each NEO.
27 Base Salary Decisions
When appropriate, the Compensation Committee increases base salaries both to ensure consistency with market competitive practices and to recognize the critical value of each senior executive’s management of S&T. In 2015 and 2016, the Compensation Committee approved salary increases that recognized each NEO’s success in 2014 and 2015, respectively, in executing our key strategic initiatives of loan growth, improving asset quality and expense control. The following table summarizes base salary decisions made for NEOs for 2015 and 2016.
2014 Salary (Effective 2015 Salary 2016 Salary Name 1/01/2014) (Effective 1/01/2015) % Increase (Effective 1/01/2016) % Increase Todd Brice $550,000 $585,000 6.36% $610,000 4.27% Mark Kochvar 295,000 315,000 6.78% 327,500 3.97% David Antolik 322,000 347,000 7.76% 361,000 4.03% David Ruddock 279,000 298,000 6.81% 308,500 3.52% Ernest Draganza 273,000 291,500 6.78% 301,700 3.50% David Richards (1) 236,000 236,000 0.00% 243,000 2.97%
(1) Mr. Richards was hired on March 3, 2014.
Summary of Management Annual Incentive Decisions for 2015 Performance
Our 2015 EPS result of $1.98 was under the $2.05 Target Performance Level, resulting in a Payout Level Percentage of 65% of the 60% Allocated Target. The Deposit Growth Performance Measure was not met; therefore, none of the 10% Allocated Target was earned. Based on achieving the between the Threshold and Target Performance Levels of EPS and the level of achievement of individual/unit goals, but not achieving the Customer Deposit Growth Performance Goal, at its meeting on March 21, 2016, the Compensation Committee approved the following cash awards under the 2015 MIP to each NEO:
Named Executive Officer Award Todd Brice, President, President and Chief Executive Officer $134,521 Mark Kochvar, Senior Executive Vice President and Chief Financial Officer 59,535 David Antolik, Senior Executive Vice President and Chief Lending Officer 71,829 David Ruddock, Senior Executive Vice President and Chief Operating Officer 59,540 Ernest Draganza, Senior Executive Vice President and Chief Risk Officer 58,701 David Richards, Executive Vice President and Market Executive (1) N/A
(1) Mr. Richards participates in the State College Plan, in lieu of the MIP. Under that plan, he earned $72,036 in 2015.
The award amounts are disclosed in the Summary Compensation Table on page 35 of this Proxy Statement.
2015 Long-Term Incentive Awards
On March 16, 2015, the Compensation Committee awarded the NEOs equity denominated long-term incentive awards under the 2015 LTIP. Grants were made at a grant price equal to $29.12 per share, which was the average of the high and low price of S&T Common Stock for the ten trading days ending on the grant date. Each NEO’s target award consists of the following:
• Half in the form of performance-based restricted shares which are earned over a three-year period based on return on average equity performance relative to S&T’s Peer Banks (identified on page 27 of this Proxy Statement); and
• Half in the form of time-based restricted shares which vest in equal amounts on the second and third anniversaries of their grant date.
If an NEO terminates employment prior to full vesting of any incentive award under the 2015 LTIP for any reason other than death or disability, or retirement in the case of time-based restricted shares, the award, to the extent not previously vested, shall be forfeited.
28 The following awards were granted under the 2015 LTIP to the NEOs:
Number of Number of Value of 2015 Time-Based Performance- Named Executive Officer LTIP Award Shares Based Shares Todd Brice, President, President and Chief Executive Officer 234,000 4,018 4,017 Mark Kochvar, Senior Executive Vice President and Chief Financial Officer 110,250 1,893 1,893 David Antolik, Senior Executive Vice President and Chief Lending Officer 121,450 2,085 2,085 David Ruddock, Senior Executive Vice President and Chief Operating Officer 104,300 1,791 1,790 Ernest Draganza, Senior Executive Vice President and Chief Risk Officer 102,025 1,752 1,751 David Richards, Executive Vice President and Market Executive 59,000 1,013 1,013
As of March 31, 2016 and projected as of December 31, 2016, NEOs have the following outstanding restricted shares under the 2014 and 2015 LTIP: rx Statement Proxy Outstanding Outstanding Restricted Shares Restricted Shares Named Executive Officer March 31, 2016 December 31, 2016 Todd Brice 27,035 24,663 Mark Kochvar 12,707 11,594 David Antolik 13,956 12,741 David Ruddock 12,002 10,949 Ernest Draganza 11,740 10,710 David Richards 6,938 6,302
CHANGE IN CONTROL
Effective January 1, 2007, S&T began entering into change in control agreements with selected officers in senior management, including all the NEOs. These agreements were put in place to help ensure that S&T’s leadership team remains engaged and focused should the organization ever become the target of a change in control where their jobs or ongoing compensation could be at risk. On December 31, 2008, S&T restated these change in control agreements for the purpose of complying with the requirements of Section 409A. Effective April 7, 2015, S&T restated these change in control agreements for the purpose of updating them to reflect current market practices. The primary terms and compensation payments contemplated by the agreements have been modified but now also include robust non-competition and non-solicitation provisions, one or both of which must be agreed to by the executive in order to receive the benefits provided. The agreements provide for the following compensation:
• S&T’s CEO will receive (a) a lump sum payment of 300% of the sum of his base salary and target bonus and (b) a pro rated annual bonus (based on the NEO, target bonus) for the year of termination, payable in a lump sum if: (1) his employment is involuntarily terminated without cause within six months preceding a change in control; (2) his employment is involuntarily terminated without cause within three years following a “change in control” (as defined below); or (3) he terminates his employment for “good reason” (as defined below) within three years following a change in control. • Depending upon their date of promotion, the other NEOs will receive (a) a lump sum payment of 200% of his base salary and target bonus and (b) a pro rated annual bonus (based on the NEO, target bonus) for the year of termination, payable in a lump sum if: (1) the NEO’s employment is involuntarily terminated without cause within six months preceding a change in control; (2) the NEO’s employment is involuntarily terminated without cause within two years following a “change in control” (as defined below); or (3) the NEO terminates his employment for “good reason” (as defined below) within two years following a change in control. • Payments under the agreements shall be paid or provided (or commence to be paid or provided) within five (5) business days after the executive has satisfied the requirement that executive sign an irrevocable release of all claims against S&T, subject to a six-month delay for compliance with Section 409A, if necessary. (See “Tax Considerations” below). The CEO and NEOs who receive either 300% or 200% of their salary and target annual bonus in a change in control will also be subject to twelve (12) month non-competition and non-solicitation covenants. NEOs who receive 100% of salary and annual bonuses are subject to twelve (12) month non-
29 solicitation covenants. Each agreement provides that if the executive’s employment is terminated without cause, or terminates for good reason, within the three or two years of a change in control, as applicable for that particular executive, he will also receive payments equal to the amount of money required to maintain health benefits under COBRA. These additional benefits will continue for three years for the President and CEO and for two years for the other NEOs. Each agreement provides that, in the event any benefit received by a NEO in connection with a change in control or in connection with the termination of the NEO’s employment (whether pursuant to the agreement or any other plan, arrangement or agreement) (collectively, the “Total Benefits”) would be subject to the excise tax imposed under Section 4999 of the Code (the golden parachute excise tax), then the Total Benefits will be reduced to the extent necessary so that no portion of the Total Benefits is subject to such excise tax.
The agreements define “good reason” as the occurrence of any of the following (without the executive’s consent) after a change in control:
• A material diminution of the executive’s duties, authority or responsibility, or any material change in the geographic location at which the executive must perform services (in this case, a material change means any location more than 40 land miles from the location prior to the change in control); • A material breach of the obligation imposed under the agreement for S&T (or any successor) to (a) continue to provide the executive after a change in control with benefits substantially similar to those enjoyed by the executive under any of S&T’s pension, life insurance, medical, health and accident, disability or other welfare plans (but not including annual bonus or incentive or equity-based compensation plans) in which the executive was participating at the time of the change in control, unless the nature of the change in benefit levels is consistent with changes to benefits levels provided to employees at the same or equivalent level or title as the executive; (b) provide annual bonus and incentive compensation opportunities that are not less favorable than provided prior to the change in control; or (c) provide the executive with the number of paid vacation days to which the executive is entitled to on the basis of years of service with S&T in accordance with S&T’s normal vacation policy in effect at the time of a change in control; • A material breach of the obligation imposed under the agreement that the agreement be binding upon any successor to S&T; or • A reduction of more than 10% in the executive’s annual base salary by S&T.
An executive cannot terminate for “Good Reason” unless (a) the executive shall have given written notice of such event to S&T within ninety (90) days after the initial occurrence thereof, (b) S&T shall have failed to cure the situation within thirty (30) days following the delivery of such notice (or such longer cure period as may be agreed upon by the parties), and (c) the executive terminates employment within six (6) months after the initial notification of the event constituting Good Reason.
A “change in control” is defined in the agreements as the occurrence of any of the following:
• Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act in effect on the execution date of the agreement), other than a pension, profit-sharing or other employee benefit plan established by S&T, that is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act in effect as of the date first written above), directly or indirectly, of securities of S&T representing twenty- five percent (25%) or more of the combined voting power of the S&T’s then outstanding securities; • During any period of two consecutive years, individuals who at the beginning of such period constitute the S&T Board cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least a majority of the directors then in office who were directors at the beginning of the period; • The consummation of a merger or consolidation of S&T with any other corporation, other than a merger or consolidation which would result in the voting securities of S&T outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of S&T or such surviving entity outstanding immediately after such merger or consolidation; • The shareholders of S&T or the S&T Board approve a plan of complete liquidation or an agreement for the sale of or disposition (in one transaction or a series of transactions) of all or substantially all of S&T’s assets; or 30 • Any other event that constitutes a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act or any successor provision.
The agreements specifically exclude public stock offerings by S&T and convertible debt offerings by S&T from the definition of “change in control.”
The Compensation Committee believes that the agreement provides reasonable protection to the individual members on the senior management team and thereby aligns senior management’s interest with the interest of S&T’s shareholders.
OTHER COMPENSATION-RELATED PROVISIONS
Stock Ownership Guidelines
The Compensation Committee continues to believe that stock ownership in S&T is important to align shareholder and
management interests. On December 17, 2007, the Compensation Committee adopted stock ownership guidelines for certain Statement Proxy executives, including the NEOs, beginning on January 1, 2008. Under the guidelines, the CEO, senior executive vice presidents, executive vice presidents and senior vice presidents should own Common Stock having a market value equal to the following multiple of the individual’s base salary:
Role Multiple of Fair Market Value of Common Stock President and Chief Executive Officer 3X SEVPs 2X EVPs and SVPs 1X
Currently, Messrs. Brice, Kochvar, Antolik, Ruddock and Draganza meet the ownership guidelines. The guidelines do not establish a deadline for compliance with the stock ownership requirements; however, the Compensation Committee established additional guidelines that limit senior management to the right to liquidate only the number of the vesting restricted shares of Common Stock sufficient for paying current tax liabilities on the vesting shares, until the officer achieves the stock ownership guidelines.
Claw-Back Feature
The Compensation Committee adopted a claw-back feature in 2010. All payments are subject to claw-back provisions that can result in the awards being canceled or prior payments recouped. These claw-back provisions allow S&T to “claw back” any bonus, retention award or incentive compensation paid (or under a legally binding obligation to be paid) to an NEO or any of our next 20 most highly-compensated employees if the payment was based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria.
Risk Mitigation in Plan Design
The Compensation Committee considers, in establishing and reviewing the executive compensation program, whether the program encourages any unnecessary or excessive risk taking and concludes:
• S&T’s compensation plans do not encourage executives to take unnecessary and excessive risks that could threaten the value of S&T; • The compensation plans are structured so that their potential for generating unacceptable risk that could materially affect the value of S&T is limited; and • The compensation plans are not structured to create substantial opportunities to benefit due to material manipulation of financial results.
In addition, at least annually, the Compensation Committee discusses, evaluates and reviews with S&T’s CRO the compensation arrangements to ensure that: (i) the compensation plans for senior management (senior vice presidents or higher) do not encourage the members of senior management to take unnecessary and excessive risks that threaten the value of the S&T, (ii) the compensation plans for employees do not pose unnecessary risks to S&T, and (iii) the compensation plans for employees do not encourage the manipulation of reported earnings to enhance the compensation of any of S&T’s employees. 31 Employment Agreements
S&T does not provide employment agreements for any of the NEOs. S&T believes in a policy of “at will” employment arrangements.
EFFECT OF TAXATION ON COMPENSATION PROGRAMS (TAX CONSIDERATIONS)
Code Sections 162(m) and 409A
The Compensation Committee believes that it has structured the compensation program to comply with Code Sections 162(m) and 409A. Section 162(m) of the Code generally denies a deduction to any publicly held corporation for compensation paid to its chief executive officer and its three other highest paid executive officers (other than the chief financial officer) to the extent that any such individual’s compensation exceeds $1 million.
“Qualified performance-based compensation” (as defined for purposes of Section 162(m)) is not taken into account for purposes of calculating the $1 million compensation limit, provided certain disclosure, shareholder approval and other requirements are met. The Compensation Committee is monitoring the effects of S&T’s compensation programs with regard to Section 162(m). To date, S&T has not suffered a loss of compensation deduction as a result of the $1 million limitation, and the Compensation Committee intends to take actions to minimize S&T’s exposure to nondeductible compensation expense under Section 162(m) of the Code. While keeping this goal in mind, however, the Compensation Committee reserves the right to maintain flexibility with respect to S&T’s executive compensation programs, including the awarding of compensation that may not be deductible when it believes that such payments are appropriate and in the best interests of the shareholders.
Gross-ups and IRC Section 280G
S&T does not provide any tax gross-ups to any NEOs or any other employee that may have the right to a payment upon a change in control.
32 COMPENSATION AND BENEFITS COMMITTEE REPORT
We, the Compensation and Benefits Committee (the “Compensation Committee”) of the Board of Directors of S&T Bancorp, Inc. (“S&T”), have reviewed and discussed the Compensation Discussion and Analysis included in this Proxy Statement with S&T’s management, and, based on such review and discussion, have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and S&T’s Annual Report on Form 10-K for the year ended December 31, 2015.
Review of Risk Associated With Compensation Plans
In accordance with S&T corporate policy, the Compensation Committee reviewed the incentive compensation arrangements for senior management (senior vice president and higher) with S&T’s Chief Risk Officer and personnel acting in a similar capacity, to ensure that these incentive compensation arrangements do not encourage members of senior management to take unnecessary and excessive risks that threaten the value of the institution. The Compensation Committee meets annually with the Chief Executive Officer, Chief Risk Officer and the Director of Human Resources to, among other things: Statement Proxy
1. Discuss the long-term and short-term risks that the bank faces that could threaten the value of S&T; 2. Identify the features of the S&T’s incentive compensation arrangements that could lead members of senior management to take such risks or focus on short-term results and how to limit those features; and 3. Review the employee compensation plans and eliminate features in those plans that could encourage manipulation of reported earnings.
The Compensation Committee reviewed the following senior management compensation plans and employee compensation plans: the 2015 Management Incentive Plan (“2015 MIP”); the 2015 Long-Term Incentive Plan (“2015 LTIP”); the 2015 Employee Incentive Plan (“2015 EIP”); the Commercial Lender Incentive Plan, an incentive for commercial lending employees based on loan fee income and new deposits generated; and 34 other employee incentive compensation plans which were determined by the Compensation Committee to be low risk.
On March 16, 2015, the Compensation Committee approved the 2015 MIP, the 2015 LTIP and the 2015 EIP. The purpose of the 2015 MIP was to provide senior management with an annual incentive opportunity designed to: (i) create focus on specific planned performance goals, (ii) deliver a portion of a competitive pay package in a form that was not fixed but varies in relation to the performance of S&T and (iii) serve as a vehicle for recruitment and retention. The 2015 MIP provided for an annual incentive based on individual performance and S&T’s financial performance relative to goal for earnings per share ("EPS") and for Deposit Growth (the net increase of nonbroker deposits in the plan year). The target annual incentive payout was based on a percentage of base salary, as follows: the Chief Executive Officer, 35%; Senior Executive Vice President, 30%; Executive Vice President, 20%; and Senior Vice President, 10%. For the Chief Executive Officer, Senior Executive Vice Presidents and Executive Vice President, 70% of each participant’s award was earned based on corporate results (60% EPS and 10% Deposit Growth), and 30% was based on performance relative to individual goals. For Senior Vice Presidents, each participant’s award was based 50% on corporate results (40% EPS and 10% Deposit Growth) and 50% on performance relative to individual goals.
For 2015, the Compensation Committee determined that S&T achieved between the threshold and target levels of $1.90 and $2.05, respectively, for its EPS financial performance goal with an EPS of $1.98, but Deposit Growth was under the goal of $242 million. Since S&T met the “Shareholder Protection Feature” (that is, exceeded the “well-capitalized” capital ratio requirement) and the “Minimum Gateway Requirement” (at least 5% return on average equity ("ROAE"), the Compensation Committee determined that payments would be made under the 2015 MIP for its EPS financial performance for the 2015 fiscal year. The Compensation Committee also reviewed senior management’s performance relative to individual goals and approved payments for achievement of those individual goals.
The 2015 LTIP provides senior management with a long-term incentive opportunity designed to: (i) create focus on specific long-term goals aligned with shareholder interests, (ii) deliver a portion of a competitive pay package in a form that is not fixed but varies in relation to the long-term performance of S&T and (iii) serve as a vehicle for recruitment and retention. The target incentive is based on a percentage of base salary, as follows: Chief Executive Officer, 40%; Senior Executive Vice President, 35%; Executive Vice President, 25%; and Senior Vice President, 10%. The incentive is in the form of shares of restricted stock equal to the target incentive divided by a grant date share value. One half of the shares will be
33 earned based on remaining with S&T for two to three years (time-based restricted share awards). The other half will be earned based on S&T’s ROAE performance over a three-year period compared to the Peer Banks (performance-based restricted share awards). The number of performance-based restricted share awards earned may rise to 120% of the target number of shares or shrink to zero shares based on performance. Participants can earn an additional 30% of their target incentive if S&T’s cumulative Total Shareholder Return (“TSR”) for the three year performance period exceeds the cumulative TSR for more than half of S&T’s Peer Group (i.e., exceeds the 50th percentile of the Peer Group). The maximum payout of performance-based restricted share awards under the 2015 LTIP is 150% of the target incentive for such awards. Payments to the NEOs will be made in the form of shares of long-term restricted stock subject to vesting requirements and transferability restrictions. Payments are also subject to claw-back provisions, whereby a payment may be recovered by S&T if it was based on materially inaccurate financial statements (which includes, but is not limited to, statements of earnings, revenues, or gains) or any other materially inaccurate performance metric. The LTIP contains the same Shareholder Protection Feature and Minimum Gateway Requirement as the 2015 MIP as described above. The Compensation Committee believes that these features, coupled with the restricted stock and claw-back requirements, provides for substantial protection against excessive or unnecessary risk-taking by any plan participant.
The 2015 EIP provided a cash incentive opportunity to all employees under the level of senior vice president, based on the achievement of a predetermined EPS goal that the Compensation Committee approved. The employees earn a percentage of their eligible compensation. The EPS goals and incentive percentages for 2015 were: $1.90 for a 1% incentive, $2.05 for a 2% incentive, and $2.20 and above for a 3% incentive. Eligible employees earned a 1.53% incentive for 2015, since the S&T achieved an EPS of $1.98. The Compensation Committee implemented the 2016 Employee Incentive Plan, which is substantially similar to the 2015 EIP and is based on EPS goals.
In 2015, the Compensation Committee engaged Aon Hewitt to review the MIP and LTIP for 2015.
After a careful evaluation of all employee incentive plans, the Committee concluded:
• S&T’s incentive compensation plans do not encourage members of senior management to take unnecessary and excessive risks that could threaten the value of S&T; • The incentive compensation plans are structured so that their potential for generating unacceptable risk that could materially affect the value of S&T is limited; and • The incentive compensation plans are not structured to create substantial opportunities to benefit due to material
Compensation and Benefits Committee: Jeffrey Grube (Chairman) John Delaney Michael Donnelly Jerry Hostetter Steven Weingarten
34 EXECUTIVE COMPENSATION
The following table provides information concerning remuneration of the NEOs during 2013-2015.
Summary Compensation Table
Non-Equity Change in Stock Incentive Plan Pension All Other Bonus Awards Compensation Value Compensation Name and Principal Position Year Salary ($) (1) ($) (2) ($) (3) ($) (4) ($) (6) Total ($) Todd D. Brice 2015 585,000 0 234,000 134,521 319,400 62,328 1,335,249 President and Chief Executive 2014 550,000 0 220,004 225,225 637,500 50,077 1,682,806 Officer 2013 525,000 52,500 0 0 0 53,088 630,588
Mark Kochvar 2015 315,000 0 110,250 59,535 145,500 23,431 653,716 Sr. Executive Vice President and 2014 295,000 0 103,242 103,678 266,900 21,196 790,016 rx Statement Proxy Chief Financial Officer 2013 278,000 27,800 0 0 16,200 20,222 342,222
David G. Antolik 2015 347,000 0 121,450 71,829 106,100 33,875 680,254 Sr. Executive Vice President and 2014 322,000 0 112,703 115,920 242,300 29,836 822,759 Chief Lending Officer 2013 302,000 30,200 0 0 0 25,980 358,180
David P. Ruddock 2015 298,000 0 104,300 59,540 154,400 31,600 647,840 Sr. Executive Vice President and 2014 279,000 0 97,653 99,185 291,100 32,716 799,654 Chief Operating Officer 2013 265,000 26,500 0 0 0 24,824 316,324
Ernest J. Draganza 2015 291,500 0 102,025 58,701 112,800 27,438 592,464 Sr. Executive Vice President and 2014 273,000 0 95,550 98,280 210,900 18,079 695,809 Chief Risk Officer 2013 260,000 26,000 0 0 22,600 17,169 325,769
David Z. Richards (5) 2015 236,000 0 59,000 72,036 0 278,494 645,530 Executive Vice President and 2014 189,708 111,810 59,000 0 0 19,619 380,137 Market Executive 2013 0 0 0 0 0 0 0
(1) The Compensation Committee awarded a discretionary bonus to executives in 2013, including the NEOs, in the amount of 10% of base salary earned. Mr. Richards was hired in 2014, and received a signing bonus of $111,810. (2) On March 16, 2015, the Compensation Committee granted long term restricted stock at a grant price of $29.12. On May 19, 2014, the Compensation Committee granted long term restricted stock at a grant price of $23.19. The grants were in accordance with the 2015 and the 2014 LTIP, respectively, pursuant to the Compensation Committee's authority under the 2014 Plan. No grants of restricted stock were awarded in 2013. (3) This column includes the incentive payments resulting from the MIPs for 2014 and 2015, which the Compensation Committee approved on March 17, 2014 and March 16, 2015, respectively, for performance during the previously completed fiscal year. No management incentive bonuses were earned during fiscal year 2013. See “Management Incentive Awards” in the “Compensation Discussion and Analysis” on page 22. The incentive for Mr. Richards is for the State College Market Growth Incentive Plan, in which he participates in lieu of the MIP. (4) This column shows the aggregate year-to-year change in the actuarial present value of the NEOs’ accrued pension benefit under all qualified and non- qualified defined benefit plans based on the assumptions used for ASC 715 “Compensation – Retirement Benefits” accounting purposes at each measurement date. As such, the change reflects changes in value due to an increase or decrease in the ASC 715 discount rate as well as changes due to compensation, service length and mortality assumptions. The change in pension value during 2013 for Messrs. Brice, Antolik, and Ruddock are negative $74,300, negative $63,500, and negative $33,700, respectively (negative amounts are not reflected in the amounts disclosed above). Since these defined benefit plans were closed to employees hired after December 31, 2007, Mr. Richards, who was hired in 2014, is not eligible to participate. (5) Mr. Richards was an executive officer of S&T until November 16, 2015, at which time the S&T Board reevaluated the officers included as executive officers for S&T. Mr. Richards would have been an NEO in 2015, except for the S&T Board’s change in the designation of its executive officers. (6) The compensation represented by the amounts for 2013, 2014, and 2015 as set forth in the All Other Compensation column for the NEOs is detailed in the following table.
35 All Other Compensation
Company Company Contributions Contributions to Company to Qualified Nonqualified Contributions Company Company Defined Defined to Health Car or Car Country Paid Life Restricted Contribution Contribution Savings Allowance Club Insurance Stock All Other Name Year Plan (a) Plan (b) Account (c) (d) Dues (e) Premiums (f) Dividends (g) Compensation Todd D. Brice 2015 9,275 16,358 0 15,648 12,301 2,438 6,308 62,328 2014 9,100 9,587 0 11,746 11,856 2,528 5,260 50,077 2013 8,925 7,518 0 15,087 11,453 2,348 7,757 53,088
Mark Kochvar 2015 8,400 0 1,500 6,000 0 4,529 3,002 23,431 2014 8,050 0 2,000 6,000 0 2,467 2,679 21,196 2013 8,050 0 0 6,000 0 2,165 4,007 20,222
David G. Antolik 2015 6,300 9,902 750 12,047 0 1,590 3,286 33,875 2014 6,125 6,202 1,000 11,932 0 1,649 2,928 29,836 2013 8,925 4,898 0 6,173 0 1,531 4,453 25,980
David P. Ruddock 2015 9,275 0 1,500 15,673 0 2,309 2,843 31,600 2014 9,100 0 2,000 15,232 1,476 2,327 2,581 32,716 2013 8,719 0 0 8,640 1,524 2,058 3,883 24,824
Ernest Draganza 2015 8,400 0 1,500 7,200 5,301 2,255 2,782 27,438 2014 6,125 0 1,000 7,200 0 1,484 2,270 18,079 2013 6,125 0 0 7,200 0 1,315 2,529 17,169
David Richards 2015 9,275 250,000 1,500 7,200 5,643 3,390 1,486 278,494 2014 4,583 0 1,667 5,815 5,641 1,468 445 19,619 2013 0 0 0 0 0 0 0 0
(a) Contributions by S&T Bank to the Thrift Plan, which is a qualified defined contribution plan. S&T Bank made matching contributions equal to 100% of the first 1% of the employee’s eligible compensation and 50% of the next 5% of the employee’s eligible compensation, up to 3.5% of the employee’s eligible compensation. The employee’s eligible compensation was $255,000 in 2013, $260,000 in 2014 and $265,000 in 2015. (b) Contributions by S&T Bank to the Nonqualified Plan that was established in order that certain management employees, including the NEOs, not lose benefits that would normally have accrued in qualified plans except for federal tax laws setting annual compensation limits for qualified plans and additional limitations related to highly-compensated employees. The contribution to Mr. Richards was an employer discretionary contribution to recognize Mr. Richards contribution to S&T’s success and to make up for his ineligibility to participate in the defined benefit pension program. (c) Contributions by S&T Bank to a health savings account (“HSA”) based on the NEO’s enrollment in S&T Bank’s high deductible health plan (“HDHP”), which is available to all S&T employees who are eligible under federal tax laws. The contribution in 2015 to the HSA was for $750 or $1,500 for individual or family coverage, respectively. (d) This column represents the aggregate incremental cost to S&T for providing a car to the NEO. The cost includes the expense of depreciation, insurance, registration fees, maintenance and fuel. Messrs. Kochvar, Draganza and Richards received car allowances, in lieu of company cars. (e) Membership dues paid to country clubs and social clubs. Expenses of a personal nature or related to a spouse are not paid by S&T. (f) This column includes the excess premiums reported as taxable compensation on the NEO’s W-2 for life insurance at three times salary. This insurance benefit is provided to all full time employees on a nondiscriminatory basis. (g) Dividends on unvested restricted Common Stock, which are reported as taxable compensation on the NEO’s W-2.
36 Grants of Plan-Based Awards for Fiscal Year 2015
Estimated Possible Payouts Under All Other Stock Non-Equity Incentive Plan Awards (1) Awards: Number Grant Date Fair Threshold Target Maximum of Shares of Stock Value of Stock and Name Grant Date ($) ($) ($) or Units (#) (2) Option Awards ($) Todd Brice 3/16/2015 85,381 197,993 259,418 3/16/2015 8,035 234,000 Mark Kochvar 3/16/2015 36,855 88,830 117,180 3/16/2015 3,786 110,250 David Antolik 3/16/2015 46,845 104,100 135,330 3/16/2015 4,170 121,450 David Ruddock 3/16/2015 38,804 87,254 114,074 3/16/2015 3,581 104,300 Ernest Draganza 3/16/2015 37,713 85,810 112,045
3/16/2015 3,503 102,025 Statement Proxy David Richards 3/16/2015— 72,036 — 3/16/2015 2,026 59,000
(1) These columns present the range of estimated payouts under the 2015 MIP. The incentive for Mr. Richards is for the State College Market Growth Incentive Plan (the "State College Plan"), in which he participates in lieu of the MIP. For the MIP, the payments assume that the NEOs earned the individual component according to their actual individual goal achievement in 2015, with the corporate component being the performance measure affecting the range of estimated payouts. The actual awards were paid on March 21, 2016 and are in the Summary Compensation Table for Fiscal Year 2015 in the Non-Equity Incentive Plan Compensation column. The actual awards were below Target, since the corporate measure for EPS was below the target level, and the measure for Deposit Growth was not achieved. The State College Plan's payout is based on the outstanding loan balance portfolio developed by the participants in at six month intervals. For a more detailed description of the 2015 MIP and the State College Market Growth Incentive Plan, see “Management Incentive Awards” in the “Compensation Discussion and Analysis” on page 22. (2) On March 16, 2015, the Compensation Committee granted restricted stock at a grant price of $29.12, which was the average of the high and low price of S&T Common Stock for the ten trading days ending on the grant date, to the NEOs, and is in the Summary Compensation Table for Fiscal Year 2015 in the Stock Awards column. The grants were in accordance with the 2015 LTIP, pursuant to the Compensation Committee’s authority under the 2014 Plan. One half of the shares will be earned based on remaining with S&T for three years; the other half will be earned based on S&T’s ROAE performance over a three year period, 2015 through 2017. For a more detailed description of the 2015 LTIP, see “Long-Term Incentive Plan” in the “Compensation Discussion and Analysis" on page 24.
37 Outstanding Equity Awards at 2015 Fiscal Year The following table sets forth information regarding the number of unexercised stock options and the number and value of unvested shares of restricted stock outstanding on December 31, 2015 for our NEOs. The market value of the stock awards is based on the closing price of S&T Common Stock as reported on The NASDAQ Stock Market on December 31, 2015 which was $30.82.
Option Awards Stock Awards Number of Number of Securities Securities Number of Market Value Underlying Underlying Shares or of Shares or Unexercised Options Option Option Unites of Stock Units of Stock Options Unexercisable Exercise Price Expiration That Have Not That Have Not Name Exercisable (#) (#) ($) Date Vested (#) (1) Vested ($) Todd D. Brice Granted 05/19/2014 ————9,487 292,389 Granted 03/16/2015 ————8,035 247,639
Mark Kochvar Granted 05/19/2014 ————4,452 137,211 Granted 03/16/2015 ————3,786 116,685
David G. Antolik Granted 05/19/2014 ————4,860 149,785 Granted 03/16/2015 ————4,170 128,519
David P. Ruddock Granted 05/19/2014 ————4,211 129,783 Granted 03/16/2015 ————3,581 110,366
Ernest Draganza Granted 05/19/2014 ————4,120 126,978 Granted 03/16/2015 ————3,503 107,962
David Richards Granted 05/19/2014 ————2,544 78,406 Granted 03/16/2015 ————2,026 62,441
(1) The S&T Board awarded the restricted shares of Common Stock on May 19, 2014 and March 16, 2015 pursuant to the 2014 and 2015 LTIPs, respectively, with 50% vesting on the third anniversary, based on achievement of corporate performance goals, and 25% vesting on the second and third anniversaries, respectively.
Option Exercises and Stock Vested in Fiscal Year 2015
The following table sets forth information regarding the number and value restricted stock vested during 2015 for our NEOs.
Option Awards Stock Awards Number or Number or Shares Value Shares Value Acquired on Realized on Acquired on Realized on Name Exercise (#) Exercise ($) Vesting (#) Vesting ($) (1) Todd D. Brice 0 0 1,626 47,439 Mark Kochvar 0 0 1,244 36,294 David G. Antolik 0 0 1,352 39,445 David P. Ruddock 0 0 822 23,982 Ernest Draganza 0 0 806 23,515 David Richards 00——
(1) The time-based shares of restricted S&T stock granted under the 2012 LTIP on March 19, 2012 vested 50% on March 19, 2014 and 50% on March 19, 2015. Fifty percent of the performance-based shares of restricted stock under the 2012 LTIP were forfeited on March 19, 2015 due to non-attainment of the minimum performance requirements. The remaining 50% of the performance-based shares were vested on March 19, 2015. The shares of restricted S&T stock granted under the 2012 LTIP were divided evenly between performance and time-based shares. The value realized on vesting is based on the average of the high and low price of S&T Common Stock on the close of the market on the date of the vesting. Mr. Richards was not a participant in the 2012 LTIP, due to his being hired in 2014. 38 Pension Benefits
Number of years Present Value of Payments of Credited Accumulated During Last Name Plan Name Service (#) Benefit ($) Fiscal Year ($) Todd D. Brice Employees’ Retirement Plan of S&T Bank 31 1,076,900 — S&T Bancorp, Inc. Supplemental Savings and Make-up Plan 31 1,508,300 — Mark Kochvar Employees’ Retirement Plan of S&T Bank 24 904,200 — S&T Bancorp, Inc. Supplemental Savings and Make-up Plan 24 195,300 — David G. Antolik Employees’ Retirement Plan of S&T Bank 26 748,200 — S&T Bancorp, Inc. Supplemental Savings and Make-up Plan 26 260,100 — David P. Ruddock Employees’ Retirement Plan of S&T Bank 31 1,113,200 — S&T Bancorp, Inc. Supplemental Savings and Make-up Plan 31 169,900 — Ernest J. Draganza Employees’ Retirement Plan of S&T Bank 19 637,400 — Statement Proxy S&T Bancorp, Inc. Supplemental Savings and Make-up Plan 19 150,100 — David Richards Employees’ Retirement Plan of S&T Bank N/A — — S&T Bancorp, Inc. Supplemental Savings and Make-up Plan N/A — —
The present values shown above are based on benefits earned as of December 31, 2015 under the terms of the Employees’ Retirement Plan of S&T Bank (the “Retirement Plan”) and the S&T Bancorp, Inc. Supplemental Savings and Make-up Plan (the “Nonqualified Plan”) as summarized below. Present values are determined in accordance with the assumptions used for purposes of measuring S&T Bank’s pension obligations under ASC 715 as of December 31, 2015, including a discount rate of 4.25%, with the exception that benefit payments are assumed to commence at age 62, the earliest age at which unreduced benefits are payable. Mr. Kochvar was eligible to retire as of December 31, 2015 and receive 67.92% of his benefits based on the reduction for early retirement described below. Mr. Richards is not eligible to participate in the “Retirement Plan” since the defined benefit plan was closed to new participants prior to his hire date.
On January 25, 2016, the Board of Directors approved an amendment to freeze benefit accruals under the Retirement Plan and Nonqualified Plan effective March 31, 2016. This change will result in no additional benefits being earned by participants in those plans based on service or pay after March 31, 2016.
Employees’ Retirement Plan of S&T Bank
The Employees’ Retirement Plan of S&T Bank (“Plan”) is a defined benefit pension plan that covers substantially all employees hired prior to 2008. The Plan provides benefits that are based on years of service and compensation. Benefits payable under the Plan at normal retirement, age 65, are determined under the following formula.
1.0% of Average Final Compensation up to Covered Compensation, times Benefit Service Plus 1.5% of Average Final Compensation in excess of Covered Compensation, times Benefit Service
For purposes of determining the normal retirement benefit, the terms used above have the following meanings:
• Average Final Compensation is the average compensation received during the highest five consecutive years out of the last ten years prior to retirement or termination of employment. Compensation generally means total cash remuneration determined before reductions for employee contributions for 401(k) or other pre-tax benefits, but does not include amounts deferred under the S&T Bancorp, Inc. Supplemental Savings and Make-up Plan. Compensation is limited each year as required by Federal law (limit was $260,000 for 2014). • Covered Compensation is the average of the Social Security taxable wage bases in effect for each year in the 35-year period ending with the calendar year in which a participant retires or terminates employment. • Benefit Service generally means an employee’s period of employment with S&T Bank after attainment of age 21.
39 Participants’ benefits under the Plan are 100% vested after completion of five years of service. Participants who terminate employment prior to age 55 with a vested benefit are entitled to receive their full accrued benefit at normal retirement, age 65, or upon election, can receive actuarially reduced benefits as early as age 55. Participants who terminate employment after age 55 with at least ten years of service are eligible to receive early retirement benefits under the Plan. For participants who met certain age and service requirements as of December 31, 2007, early retirement benefits are reduced 5/12 of 1% for each month by which the date benefit payments commence precedes age 62. For participants who did not meet these requirements, early retirement benefits are reduced 5/12 of 1% for each month by which the date benefit payments commence precedes age 65.
Accrued benefits under the Plan are payable in the form of a ten-year certain and life annuity that provides equal monthly payments for the participant’s life with a minimum of 120 monthly payments guaranteed. Married participants must receive their benefit in the form of a 50% joint and survivor annuity with 120 monthly payments guaranteed unless their spouse consents to a different form of a payment. A 50% joint and survivor annuity provides a reduced monthly payment for the participant’s life with 50% of the payment continuing for the spouse’s life following the participant’s death. Various optional annuity forms of payment are available under the Plan, including a single lump sum payment. All forms of payment are actuarially equivalent in value.
S&T Bancorp, Inc. Supplemental Savings and Make-up Plan
As noted above under the definition of Average Final Compensation for the Employees’ Retirement Plan of S&T Bank, compensation deferred under the S&T Bancorp, Inc. Supplemental Savings and Make-up Plan (the “Nonqualified Plan”) is not included as eligible compensation and includable compensation is limited as a result of maximums imposed by law. The Nonqualified Plan restores benefits that are not payable by the Retirement Plan as a result of the executive’s election to defer compensation or as a result of the compensation limit. The provisions described above for the Retirement Plan apply to this plan as well, with the exception that upon termination or retirement participants automatically receive their benefit in the form of an actuarially equivalent lump sum, which is credited to their account under this plan and paid out in accordance with their distribution election.
Nonqualified Deferred Compensation
The following table provides information with respect to the Nonqualified Plan and the NEOs. The amounts shown include compensation earned and deferred in prior years, and earnings on, or distributions of, such amounts.
Executive Registrant Contributions in Contributions in Aggregate Aggregate Aggregate Balance Last Fiscal Year Last Fiscal Year Earnings in Last Withdrawals/ at Last Fiscal Year Name ($) ($) (1) Fiscal Year ($) Distributions ($) End ($) Todd Brice 32,716 16,358 9,430 0 436,431 Mark Kochvar 0 0 5,063 0 211,464 David Antolik 28,292 9,902 5,049 0 243,055 David Ruddock 0000 — Ernest Draganza 0 0 450 0 18,749 David Richards 0 250,000 (3,218) (5,840) 240,942
(1) The amounts in this column have been included in the “All Other Compensation” column of the Summary Compensation Table on page 36. (2) Mr. Richards elected to have the Social Security and Medicare taxes withheld from the employer contribution prior to deposit to the Rabbi Trust.
The Nonqualified Plan offers certain management employees, including the NEOs, the opportunity to continue to defer income on a tax deferred basis that exceeds annual contribution or compensation limits for qualified plans. In addition, the Nonqualified Plan can be used by highly-compensated employees who are limited to the salary deferral limit to the Thrift Plan. The employee may elect to defer a percentage of compensation from each payroll under the Supplemental Savings provision. The employee may also elect to contribute at the same deferral rate as for the Thrift Plan after reaching a contribution or compensation limit under the Make-up provision.
S&T Bank makes employer matching and year end profit sharing contributions to the Nonqualified Plan that cannot be made to the qualified plans due to the aforementioned limits. The match is 3.5% of the deferral amount, except the match on deferrals under the Make-up provision, which are matched 100% of the first 1% of the employee’s eligible compensation and 50% of the next 5% of the employee’s eligible compensation, up to 3.5% of the employee’s eligible compensation. The year
40 end profit sharing bonus is at the same percentage as for the Thrift Plan and applies to eligible compensation that exceeds the compensation limit for qualified plans.
The participants may elect the allocation percentages for employee deferrals and employer contributions into two large capitalization mutual funds, a balanced fund and a money market mutual fund in a Rabbi Trust. The Thrift Plan Committee at S&T Bank determines the investment vehicles in the Rabbi Trust, which currently are Vanguard 500 Index Fund Admiral, Fundamental Investors Fund Class R5, Dodge & Cox Balanced Fund and Federated Prime Obligations Fund.
As described earlier, distributions from the Nonqualified Plan are in accordance with the participant’s distribution election. The Nonqualified Plan is subject to the provisions of Section 409A of the Code.
Termination of Employment and Change-in-Control Arrangements
As described above, our NEOs do not have employment agreements. The NEOs would receive payments from S&T in connection with a termination from employment pursuant to their change-in-control agreements. The amount of the payment would vary, depending upon whether the termination was due to resignation, retirement, severance, good cause or change in Statement Proxy control of S&T. In the event of death, the NEO’s beneficiary, heirs or estate would be entitled to certain payments.
Resignation. There are no employment agreements between S&T and any of the NEOs; therefore, in the event of resignation, the NEO would receive salary payments and participate in S&T’s benefit plans through the date of separation from employment. There would be no additional payments.
Retirement. Upon retirement, the NEOs would receive pension benefits as described above in the “Retirement Plan” and the “Nonqualified Plan.” Married participants must receive their benefit in the form of a 50% joint and survivor annuity with 120 monthly payments guaranteed unless their spouse consents to a different form of a payment. Various optional annuity forms of payment are available under the Retirement Plan, including a single lump sum payment. All forms of payment are actuarially equivalent in value.
The Retirement Plan Date Annual The Nonqualified Plan, Lump Payable (1) Benefit (2) Sum Benefit as of 1/1/2015 (3) Todd D. Brice age 65 $102,400 $535,000 Mark Kochvar 1/1/2016 53,400 128,300 David G. Antolik age 65 84,400 79,100 David P. Ruddock age 65 97,000 63,200 Ernest J. Draganza age 65 66,600 48,900 David Z. Richards N/A N/A N/A
(1) Mr. Kochvar was eligible to retire and receive 67.92% of his benefit payable on January 1, 2016 as described in "The Retirement Plan" above. Messrs. Brice, Antolik, Ruddock, and Draganza were not eligible for early retirement as of December 31, 2015, and are presented at what their respective benefit would be upon retirement at age 65 if they had terminated employment on December 31, 2015. Mr. Richards is not eligible to participate in the “Retirement Plan” since the defined benefit plan was closed to new participants prior to his hire date. (2) The NEOs are married participants and must receive their benefit in the form of a 50% joint and survivor annuity with 120 monthly payments guaranteed unless their spouse consents to a different form of a payment. The annual benefits shown in this column are payable for the participant’s life with a minimum of 120 monthly payments guaranteed. After 120 monthly payments have been made, 50% of the amount shown continues for the spouse’s life following the participant’s death. If the NEO became deceased prior to retiring, the NEO's surviving spouse would receive the amount shown for ten years commencing as of the date shown, reducing to 50% of the amount shown after ten years and continuing for the remainder of her lifetime. (3) The NEO receives a lump sum payment upon retirement or termination as described above in the “Nonqualified Plan." The lump sum payment is determined as the present value of a ten-year certain and life annuity based on an interest rate of 8.0% and a mortality table specified by the terms of the plan, and is deposited into the NEO's Nonqualified Plan deferred compensation account. Currently, the NEOs have elected to receive a lump sum distribution at age 70, but may change their elections to an earlier date, for the amount of their payments accrued prior to January 1, 2005. The NEOs individually elected a time and form of payment for payments accrued after December 31, 2004, as allowed by the Nonqualified Plan and permitted by Section 409A.
Severance, constructive termination and change in control. As described in the CD&A, during 2015, S&T had change in control agreements in effect with each of the NEOs. The agreement for Mr. Brice provided that he will receive (a) a lump sum payment of 300% of the sum of his base salary and target bonus and (b) a pro rated annual bonus (based on the NEO, target bonus) for the year of termination, payable in a lump sum if: (1) his employment is involuntarily terminated without cause within six months preceding a change in control; (2) his employment is involuntarily terminated without cause within three years following a “change in control” (as defined above); or (3) he terminates his employment for “good reason” (as defined below) within three years following a change in control. Each agreement for the other NEOs provides that he will receive (a) a lump sum payment of 200% of the sum of his base salary and target bonus and (b) a prorated annual 41 bonus (based on the NEO, target bonus) for the year of termination, payable in a lump sum if: (1) the NEO’s employment is involuntarily terminated without cause within six months preceding a change in control; (2) the NEO’s employment is involuntarily terminated without cause within two years following a “change in control” (as defined above); or (3) the NEO terminates his employment for “good reason” (as defined below) within two years following a change in control. Payments under the agreements shall be paid or provided (or commence to be paid or provided) within five (5) business days after the executive has satisfied the requirement that executive sign an irrevocable release of all claims against S&T, subject to a six- month delay for compliance with Section 409A, if necessary. (See “Tax Considerations” above). The CEO and NEOs who receive either 200% or 300% of their salary and target annual bonus in a change in control will also be subject to twelve (12) month non-competition and non-solicitation covenants. Each agreement provides that if the executive’s employment is terminated without cause, or terminates for good reason, within the three or two years of a change in control, as applicable for that particular executive, he will also receive payments equal to the amount of money required to maintain health benefits under COBRA. These additional benefits will continue for three years for the President and CEO and for two years for the other NEOs. Each agreement provides that, in the event any benefit received by a NEO in connection with a change in control or in connection with the termination of the NEO’s employment (whether pursuant to the agreement or any other plan, arrangement or agreement) (collectively, the “Total Benefits”) would be subject to the excise tax imposed under Section 4999 of the Code (the golden parachute excise tax), then the Total Benefits will be reduced to the extent necessary so that no portion of the Total Benefits is subject to such excise tax. The definition of “change in control,” as used in the change in control agreements, is fully described on page 29 of this Proxy Statement under the section “Change in Control.” In addition, unvested nonstatutory stock options would immediately vest and become exercisable, under the S&T Bancorp, Inc. 2003 Stock Incentive Plan and the 2014 Plan.
The following table provides the payments that each NEO would have received under his change in control agreement in the event of a without cause or good reason termination (as described above) upon a change in control of S&T at December 31, 2015:
Payment in Value of Vesting Lieu of Multiple of Lump Sum Nonstatutory Medical Total Value of Name Salary Payment Stock Options(1) Coverage(2) Payments Todd Brice 3X $1,830,000 $0 $47,286 $1,877,286 Mark Kochvar 2X 655,000 0 20,532 675,532 David Antolik 2X 722,000 0 13,188 735,188 David Ruddock 2X 617,000 0 31,524 648,524 Ernest Draganza 2X 603,400 0 31,524 634,924 David Richards 2X 486,000 0 23,441 509,441
(1) All remaining stock options expired unexercised on December 19, 2015. No stock options are currently outstanding. (2) The amount of money required to maintain health benefits under COBRA for two or three years, as applicable and in accordance with the terms of the executive’s change in control/severance agreement.
Death. Upon the death of an NEO, except for what is described above for termination due to retirement, there are no payments above the life and accidental death and dismemberment insurance proceeds through the S&T Bank Welfare Benefit Plan.
42 RELATED PERSON TRANSACTIONS
Transactions with Related Parties
S&T Bank has made, and expects to make in the future, extensions of credit in the ordinary course of business to certain directors and officers. These loans are made on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the same time for comparable loans with persons not related to S&T Bank. Such loans do not involve more than normal risk of collectability or present unfavorable features.
On January 31, 1992, S&T Bank entered into a limited partnership arrangement with RCL Partners, Inc. for the construction of 30 apartments in Indiana, Pennsylvania targeted for senior citizens. The total investment by S&T Bank in 1992 was $1,761,766 and entitled S&T Bank to certain tax credits, tax depreciation benefits and a share of cash flows under the Code Section 42 program. Messrs. Delaney (and affiliated parties) and Gatti (and affiliated parties), members of the S&T Board, each hold a one-third interest in RCL Partners, Inc.
During 2015, S&T Bank made payments of $301,818 to a company owned by Mr. Thomas A. Brice for the purchase of Statement Proxy furniture and other furnishings for branch and loan production offices and operational centers. Mr. Thomas A. Brice’s son, Todd D. Brice, is a director and is employed by S&T and S&T Bank as President and Chief Executive Officer. Todd Brice earned $585,000 in salary and bonuses in 2015 as disclosed in the Summary Compensation Table on page 35.
During 2015, S&T Bank made payments of $174,662 to Ms. Toretti (and affiliated parties), a member of the S&T Board, for the lease of operations, branch and administrative facilities and parking spaces. On October 1, 1986, S&T Bank entered into an agreement to lease, from Ms. Toretti and Michael Toretti as trustees under an irrevocable trust, a building and land used as S&T Bank’s North Fourth Street branch and operations center. The terms of the agreement provide for payment of $10,000 per month for the first five years and options to renew for four five-year terms with rent for each option term to be the rent from the previous term, plus 5%. On October 1, 2006, S&T Bank exercised its fourth renewal option at $12,155 per month. Additionally, in September 2006, S&T Bank exercised an extension agreement beginning October 1, 2011 at $12,763 per month providing for four five-year terms at the same terms and conditions of the original lease. The second renewal option will start October 1, 2016 at $13,401 per month, providing the same terms and conditions as the original lease. On December 29, 2010, S&T entered into a sublet agreement for parking spaces with Palladio, LLC, a related entity of Ms. Toretti, to lease 14 parking spaces for $9,818 from January 1, 2011 through September 15, 2011. On June 27, 2011, written consent was given by landlord to tenant to sublet the 14 spaces to S&T, effective September 16, 2012, for $14,280 per year, increasing $420 per year over the remaining five-year term. S&T prepaid $15,540 for parking spaces through September 15, 2015. S&T also paid $5,970 for snow removal for the leased parking spaces. Total payment for 2015 was $21,510. See also “Compensation Committee Interlocks and Insider Participation” on page 12.
Review, Approval or Ratification of Transactions with Related Persons
S&T has a written policy for the review, approval or ratification of transactions with Related Persons and Related Parties (collectively, the “Related Parties”). On an annual basis, each director and executive officer must submit a Director and Executive Officers’ Questionnaire (the “Questionnaire”) for the purpose of assisting in the administration of this policy. The Questionnaire requests the identification of the Related Parties.
Any person nominated to stand for election as a director must submit a Questionnaire no later than the date of his or her nomination. Any person who is appointed as a director or an executive officer must submit a Questionnaire prior to such person’s appointment as a director or executive officer, except in the case of an executive officer where due to the circumstances it is not practicable to submit the Questionnaire in advance, in which case the Questionnaire must be submitted as soon as reasonably practicable following the appointment.
Directors and executive officers are expected to notify the CRO of any updates to the list of Related Parties. The CRO disseminates a Related Party master list as appropriate within S&T. The recipients of the master list utilize the information contained therein in connection with their respective business units, departments and areas of responsibility to effectuate this policy.
The S&T Board has determined that the Nominating Committee is best suited to review and approve Related Party Transactions.
43 At each calendar year’s first regularly scheduled Nominating Committee meeting, management recommends Related Party Transactions to be entered into by S&T for that calendar year, including the proposed aggregate value of such transactions if applicable. In addition, the Nominating Committee reviews any previously approved or ratified Related Party Transactions that remain ongoing. Based on all relevant facts and circumstances, taking into consideration S&T’s contractual obligations, the Nominating Committee determines if it is in the best interests of S&T and its shareholders to approve or disapprove such proposed transactions or to continue, modify or terminate ongoing Related Party Transactions.
At each subsequently scheduled meeting, management updates the Committee as to any material change regarding approved Related Party Transactions.
In the event management recommends any further Related Party Transactions subsequent to the first calendar year meeting, such transactions may be presented to the Nominating Committee for approval or preliminarily entered into by management subject to consultation with the Nominating Committee Chairperson, and ratification by the Nominating Committee at the next scheduled meeting; provided that if ratification shall not be forthcoming, management will make all reasonable efforts to cancel or annul such transaction.
The Nominating Committee has reviewed the types of Related Party Transactions described below and determined that each of the following Related Party Transactions will be deemed to be pre-approved by the Nominating Committee:
1. Any compensation paid to executive officers provided S&T’s Compensation Committee approved or recommended that the S&T Board approve such compensation. 2. Any compensation paid to a director if the compensation is required to be reported in S&T’s proxy statement under Item 402 of the SEC’s compensation disclosure requirements. 3. Any transaction where the Related Party’s interest arises solely from ownership of Common Stock and all shareholders received the same benefit on a pro rata basis (e.g., dividends). 4. Any transaction with a Related Party involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority. 5. Any transaction with a Related Party involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services.
44 REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees S&T’s financial reporting process on behalf of the S&T Board. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of the disclosures in the financial statements.
The Audit Committee reviewed with the independent registered public accounting firm (“Independent Auditor”), who is responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States, their judgment as to the quality, not just the acceptability, of S&T’s accounting principles and such other matters as are required to be discussed with the committee under generally accepted auditing standards or as are required by Statement on Auditing Standards No. 114 (“Communication with Audit Committees”). The Audit Committee reviewed and discussed the audited financial statements with management and the Independent Auditors. The Audit Committee has discussed with the independent auditors the matters required to be discussed by the Statement on rx Statement Proxy Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has received the written communications from the Independent Auditor required by Independence Standards Board Standard No. 1 (“Independence Discussions with Audit Committees”), and has discussed with the Independent Auditor the auditor’s independence. The Audit Committee has considered the compatibility of non-audit services with the auditor’s independence.
The Audit Committee discussed with S&T’s internal auditors and Independent Auditor the overall scope and plans for their respective audits. The Audit Committee met with the internal auditors and Independent Auditor to discuss the results of their examinations, their evaluations of S&T’s internal controls and the overall quality of S&T’s financial reporting.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the S&T Board, and the S&T Board has approved, that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2015, for filing with the SEC.
Submitted by the Audit Committee of the S&T Bancorp, Inc. Board of Directors: Frank Palermo (Chairman); Jerry Hostetter; Jeffrey Grube and Frank Jones.
In accordance with and to the extent permitted by applicable law or regulation, the information contained in the Report of the Audit Committee and the Audit Committee Charter shall not be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, and shall not be deemed to be soliciting material or to be filed with the SEC under the Exchange Act.
45 SHAREHOLDER PROPOSALS
Any proposal that a shareholder of S&T intends to present at the 2017 S&T annual meeting of shareholders must be received in writing by the Secretary of S&T at S&T’s Administrative Office (its principal executive offices), 800 Philadelphia Street, Indiana, Pennsylvania, on or before December 8, 2016. If such proposal is in compliance with all of the requirements of Rule 14a-8 under the Exchange Act, the proposal will be considered for inclusion in S&T’s proxy statement and proxy form relating to such meeting.
Notice to S&T of a shareholder director nomination submitted otherwise than pursuant to Rule 14a-8 must be submitted in writing by the Secretary of S&T at S&T’s Administrative Office (its principal executive offices), 800 Philadelphia Street, Indiana, Pennsylvania, not earlier than the close of business on the 120th day, nor later than the close of business on the 60th day, immediately preceding the date of the Annual Meeting, and the persons named in the proxies solicited by S&T’s Board for its 2017 Annual Meeting of Shareholders may exercise discretionary voting power with respect to any such proposal as to which S&T does not receive a timely notice. Such proposals should be submitted by means that permit proof of the date of delivery, such as certified mail, return receipt requested.
OTHER MATTERS
Management knows of no other matters to be brought before the Annual Meeting. In accordance with the S&T By-laws, no persons other than the Company’s nominees may be nominated for director election or elected at the Annual Meeting. However, should any other matter requiring a vote of the shareholders properly come before the meeting, the persons named in the enclosed proxy will vote the shares represented by the proxies on such matter as determined by a majority of the S&T Board. Discretionary authority to vote on such matters is conferred by such proxies upon the persons voting them.
By Order of the Board of Directors,
Ernest J. Draganza Secretary
WE HAVE MAILED TO EACH PERSON BEING SOLICITED BY THE PROXY STATEMENT A COPY OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2015 (AS FILED WITH THE SEC, INCLUDING THE FINANCIAL STATEMENTS THERETO). WE WILL PROVIDE WITHOUT CHARGE TO EACH PERSON BEING SOLICITED BY THE PROXY STATEMENT, UPON THE WRITTEN REQUEST OF SUCH PERSON, ADDITIONAL COPIES OF OUR FORM 10-K. PLEASE DIRECT ALL SUCH REQUESTS TO: SECRETARY OF S&T, 800 PHILADELPHIA STREET, INDIANA, PENNSYLVANIA 15701. IN ADDITION, THE FORM 10-K AND EXHIBITS ARE AVAILABLE ON THE INTERNET AT WWW.STBANCORP.COM . THE FORM 10-K IS NOT PART OF THESE SOLICITATION MATERIALS.
April 6, 2016
46 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2015 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . Commission file number 0-12508 S&T BANCORP, INC. (Exact name of registrant as specified in its charter)
Pennsylvania 25-1434426 (State or other jurisdiction of incorporation 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 No 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 No 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 om10-K Form Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark 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. 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 No 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 Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate estimated fair value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2015: Common Stock, $2.50 par value – $991,599,929 The number of shares outstanding of the issuer’s classes of common stock as of February 21, 2016: Common Stock, $2.50 par value –34,810,374 DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement of S&T Bancorp, Inc., to be filed pursuant to Regulation 14A for the 2015 annual meeting of shareholders to be held May 18, 2016 are incorporated by reference into Part III of this annual report on Form 10-K. 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
Part II Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 16 Item 6. Selected Financial Data 17 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52 Item 8. Financial Statements and Supplementary Data 53 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 114 Item 9A. Controls and Procedures 114 Item 9B. Other Information 114
Part III Item 10. Directors, Executive Officers and Corporate Governance 115 Item 11. Executive Compensation 115 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 115 Item 13. Certain Relationships and Related Transactions, and Director Independence 115 Item 14. Principal Accountant Fees and Services 115
Part IV Item 15. Exhibits, Financial Statement Schedules 116 Signatures 119
2 PART I
Item 1. BUSINESS
General
S&T Bancorp, Inc., or S&T (also referred to below as “we”, “us” or “our”), 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 50 percent 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, 2015, we had approximately $6.3 billion in assets, $5.1 billion in loans, $4.9 billion in deposits and $792.2 million in shareholders’ equity. S&T Bank is a full service bank with its main office at 800 Philadelphia Street, Indiana, Pennsylvania, providing services to its customers through locations in Pennsylvania, Ohio and New York. On October 29, 2014 we entered into an agreement to acquire Integrity Bancshares, Inc., and the transaction was completed on March 4, 2015. The transaction was valued at $172.0 million and added total assets of $980.8 million, including $788.7 million in loans, $115.9 million in goodwill, and $722.3 million in deposits. Integrity Bank was subsequently merged into S&T Bank on May 8, 2015. S&T Bank operates under the name "Integrity Bank - A division of S&T Bank" in south-central Pennsylvania. 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 three wholly owned operating subsidiaries: S&T Insurance 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 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 have three reportable operating segments including Community Banking, Wealth Management and Insurance. Our Community Banking segment offers services which include accepting time and demand deposits and originating commercial and consumer loans. The Wealth Management segment offers brokerage services, serves as executor and trustee under wills and deeds, guardian and custodian of employee benefits and other trust 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 $2.1 billion at December 31, 2015. 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. Refer to the financial statements and Part II, Item 8, Note 25 of this Form 10-K for further details pertaining to our
operating segments. 10-K Form
Employees
As of December 31, 2015, we had 1,067 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, 2015, 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. The charters of the Audit Committee, the Compensation and Benefits Committee and the Nominating and Corporate Governance Committee, the 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, Corporate Governance Guidelines and the Shareholder Communications Policy are also available at www.stbancorp.com under Corporate Governance.
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 any regulation discussed here.
3 Item 1. BUSINESS -- continued
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 maintained a passive ownership position in Allegheny Valley Bancorp, Inc. (14.2 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. We elected to become a financial holding company under the BHCA in 2001 and thereby engage in a broader range of financial activities than are permissible for traditional bank holding companies. In order to 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, rating. Refer to Part II, Item 8, Note 24 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, 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; dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and sales agency; investment advisory activities; merchant banking activities and activities that the Federal Reserve Board has determined to be closely related to banking. Banks may also engage in, subject to limitations on investment, 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. If S&T or S&T Bank ceases to be “well-capitalized” or “well-managed,” we will not be in compliance with the requirements of the BHCA regarding financial holding 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 was 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 five 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 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. • 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.
4 Item 1. BUSINESS -- continued
S&T Bank
As a Pennsylvania-chartered, FDIC-insured commercial bank, S&T Bank is subject to the supervision and regulation of the Pennsylvania Department of Banking and Securities, or PADBS, 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 types 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 as implemented by the Federal Reserve's Regulation W, 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. Loans 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 or 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 was 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 became effective July 21, 2012. These provisions have not had 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. As an FDIC-insured bank, S&T Bank is 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 current total base assessment rates on 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. In February 2011, the FDIC Board of Directors adopted a final rule, Deposit Insurance Assessment Base, Assessment Rate 10-K Form Adjustments, Dividends, Assessment Rates and Large Bank Pricing Methodology. 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, altered assessment rates, implemented the Dodd-Frank Act’s DIF dividend provisions and revised 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 has resulted in lower FDIC expense. In addition to DIF assessments, the FDIC makes 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. The FICO assessment rate for the first quarter of 2016 is 0.580 basis points 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 rules applicable to banking organizations they supervise. At December 31, 2015, both S&T and S&T Bank met the applicable regulatory capital requirements. S&T’s leverage ratio was 8.96 percent, common equity Tier 1 risk-based capital was 9.77 percent, Tier 1 risk- based capital ratio was 10.15 percent and total risk-based capital ratio was 11.60 percent. S&T Bank’s leverage ratio was 8.43 percent, common equity Tier 1 risk-based capital was 9.55 percent, Tier 1 risk-based capital was 9.55 percent and total risk- based capital was 11.00 percent.
5 Item 1. BUSINESS -- continued
In July 2013 the federal banking agencies issued a final rule to implement Basel III (which were agreements reached in July 2010 by the international oversight body of the Basel Committee on Banking Supervision to require 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 of 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 for 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 of total risk-weighted assets beginning in 2019. The capital conservation buffer will be phased in beginning in 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 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. 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 regulatory capital rules 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.
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 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 FDIC’s deposit insurance fund in the event an 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. As of December 31, 2015, S&T Bank was classified as “well-capitalized.” New definitions of these categories, as set forth in the federal banking 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 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 risk- based capital ratio of at least 8.00 percent and a leverage ratio of at least 4.00 percent. 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 6 Item 1. BUSINESS -- continued 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 and benefits. In general, the guidelines require appropriate systems and practices to identify and manage 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. 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 PADBS also has broad enforcement powers over S&T Bank, including the power to impose fines and other 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 branches in any state 10-K Form to the same extent that a bank chartered in that state could establish a branch.
Community Reinvestment, Fair Lending and Consumer Protection Laws
In connection with its lending activities, S&T Bank is subject to a number of state and federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. The federal laws include, among others, 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 of the Consumer Financial Protection Bureau, or CFPB, 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 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 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. Fair lending laws prohibit discrimination in the provision of banking services, and the enforcement of these laws has been a focus for bank regulators. Fair lending laws included the Equal Credit Opportunity Act and the Fair Housing Act, which outlaw discrimination in credit transactions and residential real estate on the basis of prohibited factors including, among others, race, color, national origin, sex and religion. A lender may be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of applicants or borrowers. If a pattern or practice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the U.S. Department of Justice, or DOJ, for investigation. In December of 2012, the DOJ and CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share
7 Item 1. BUSINESS -- continued information, coordinate investigations and have generally committed to strengthen their coordination efforts. S&T Bank is required to have a fair lending program that is of sufficient scope to monitor the inherent fair lending risk of the institution and that appropriately remediates issues which are identified.
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 bank 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 is significantly changing the current bank regulatory structure and affecting 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. 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 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 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 the conformance date for most of the prohibitions was July 21, 2015. 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 CFPB, that took over rulemaking responsibility on July 21, 2011 for 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, or RESPA, and the Truth in Savings 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 has been consolidated into the CFPB with respect to the institutions it supervises. The CFPB established an Office of 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, communicates relevant policy initiatives to community banks and credit unions, and works 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 a bank that, together with its affiliates, has less than $10.0 billion in assets. 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 implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth 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 factors 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 a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher- priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory 8 Item 1. BUSINESS -- continued 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 a material impact on our mortgage business. In November 2013, the CFPB issued a final rule implementing the Dodd-Frank Act requirement to establish integrated disclosures in connection with mortgage origination, which incorporates disclosure requirements under RESPA and TILA. The requirements of the final rule apply to all covered mortgage transactions for which S&T Bank receives a consumer application on or after October 3, 2015. CFPB issued a final rule regarding the integrated disclosures in December 2013, and the disclosure requirement became effective in October 2015. These rules did not have a material impact on our mortgage business. The federal agencies responsible for implementing the provisions of the Dodd-Frank Act have issued a substantial number of rules. More rules will be issued. Not all of the Dodd-Frank Act provisions and their implementing regulations apply to banks the size of S&T Bank. Federal and state regulatory agencies consistently propose and adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot assess 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. We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof, although enactment of any 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 services providers, such as other financial holding companies, commercial banks, savings associations, credit unions, finance companies and brokerage and insurance firms, including competitors that provide their products and services online. 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 om10-K Form non-banking activities by bank holding companies, as well as bank mergers and acquisitions, can affect our ability to compete with other financial services providers. Our ability to do so will depend upon how successfully we can respond to the evolving competitive, regulatory, technological and demographic developments affecting our operations. Our market area includes Pennsylvania and the contiguous states of Ohio, West Virginia, New York and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this market area resulting in a geographic concentration. 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 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 consider 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. The financial services 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 to entry and enabled many 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, internet, mobile, ATMs, self-service branches, and/or in-store branches. These delivery 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.
9 Item 1A. RISK FACTORS
Investments in our common stock involve risk. The following discussion highlights the risks that we believe are material to 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 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) subjecting 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; • 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-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 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. 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 charge-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 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 changes in lending policies and practices, economic conditions, changes in the loan portfolio, changes in lending management, results of internal loan reviews, asset quality trends, collateral values, 10 concentrations of credit risk and other external factors. 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 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 impact our financial results and profitability.
Our loan portfolio is concentrated within our market area, and our lack of geographic diversification increases our risk profile.
The regional economic conditions within our market area affect 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 negatively 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.
Our loan portfolio has a significant concentration of commercial real estate loans.
The majority of our loans are to commercial borrowers. The commercial real estate, or CRE, segment of our loan portfolio typically involves higher loan principal amounts, and the repayment of these loans is generally 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 CRE often depend upon the successful operation 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 credit 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 default or have financial difficulties, we could experience higher credit losses, which could adversely impact our financial condition and results of operations. In December 2015 the FDIC and the other federal financial institution regulatory agencies released a new statement on prudent risk management for commercial real estate lending. In it, the agencies express concerns about easing commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that they will continue to pay special
attention to commercial real estate lending activities and concentrations going forward. 10-K Form
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 providers securing their information systems, over which we have no control, and a breach of their information systems 11 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.
Risks Related to Interest Rates and Investments
Our net interest income could be negatively affected by interest rate changes 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. There may be 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. 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 and financial condition.
Risks Related to Our Business Strategy
Our strategy includes growth plans through organic growth and by means of acquisitions. 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, organic growth and by means of acquisitions, both within our current footprint and market expansion. 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 successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our 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 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, including online providers of these projects and services. 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 12 of regulation that 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. Failure to compete effectively for deposit, loan and other financial services customers in our markets 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 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. 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 able 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 time and on our financial performance and outlook.
Risks Related to Regulatory Compliance and Legal Matters
Legislation enacted in response to market and economic conditions may significantly affect our operations, financial condition and earnings.
The Dodd-Frank Act was enacted as a major reform in response to the financial 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. 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.
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 10-K Form 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 Report 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 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.
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.
13 From time to time, customers and others make claims and take legal action pertaining to the performance of our responsibilities. Whether customer claims and legal action related to the performance of our responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant expenses, 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 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.
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 of Pittsburgh, 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 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 access to our line of credit. The inability to access this source 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.
Risks Related to Owning Our Stock
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 our outstanding warrant is exercised. The warrant will remain outstanding until 2019. There are 517,012 shares of common stock underlying the warrant, representing approximately 1.46 percent of the shares of our common stock outstanding as of December 31, 2015 (including the shares issuable upon exercise of the warrant in total shares outstanding). The warrant holder has the right to vote any of the shares of common stock it receives upon exercise of the 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 to or elimination of the dividends on our common stock could adversely affect the market price of our common stock.
Item 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved SEC staff comments.
14 Item 2. PROPERTIES
We own a 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 segments are also located at our headquarters. In addition, we own 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 one that houses our training center. Community Banking has 69 locations, including 65 branches located in sixteen counties in Pennsylvania, of which 36 are owned and 29 are leased, including the aforementioned building that shares space with our data center. The other four Community Banking locations include one leased loan production office in Ohio, a leased branch located in Ohio, a loan production office in western New York and our training center in Indiana County. We lease an office to our Insurance segment in Cambria County, Pennsylvania. The Insurance segment leases one additional office, and has staff located within the Community Banking offices in Indiana, Jefferson, Washington and Westmoreland Counties. Wealth Management leases two offices, one 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. Our operating leases and the one capital lease 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 10 Premises and Equipment in the Notes to Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS
The nature of our business generates a certain amount of litigation which arises in the ordinary course of business. However, in management’s opinion, there are no proceedings pending that we are a party to or our property is subject to that would be material in relation to our financial condition or 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. om10-K Form
15 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 2015 and 2014 is detailed in the table below and is based upon information obtained from NASDAQ. As of the close of business on January 31, 2016, we had 3,007 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 6 Dividend and Loan Restrictions of this Report. The cash dividends declared per share are shown below.
Price Range of Common Stock Cash Dividends 2015 Low High Declared Fourth quarter $ 29.67 $ 34.00 $ 0.19 Third quarter 26.57 33.14 0.18 Second quarter 25.68 30.13 0.18 First quarter 27.00 30.20 0.18 2014 Fourth quarter $ 23.07 $ 29.28 $ 0.18 Third quarter 23.26 25.86 0.17 Second quarter 22.21 25.20 0.17 First quarter 21.17 25.43 0.16
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 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(2) assuming a $100 investment in each on December 31, 2010.
16 Period Ending Index 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 S&T Bancorp, Inc. 100.00 89.21 85.23 122.86 148.69 157.55 NASDAQ Composite 100.00 99.20 116.79 163.69 187.91 201.27 NASDAQ Bank 100.00 89.50 106.21 150.49 157.88 171.84 (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. Item 6. SELECTED FINANCIAL DATA The tables below summarize selected consolidated financial data as of the dates or for the periods presented 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 Supplementary Data in Part II, Item 8 of this Report. CONSOLIDATED BALANCE SHEETS
December 31, (dollars in thousands) 2015 2014 2013 2012 2011 Total assets $ 6,318,354 $ 4,964,686 $ 4,533,190 $ 4,526,702 $ 4,119,994 Securities available-for-sale, at fair value 660,963 640,273 509,425 452,266 356,371 Loans held for sale 35,321 2,970 2,136 22,499 2,850 Portfolio loans, net of unearned income 5,027,612 3,868,746 3,566,199 3,346,622 3,129,759 Goodwill 291,764 175,820 175,820 175,733 165,273 Total deposits 4,876,611 3,908,842 3,672,308 3,638,428 3,335,859 Securities sold under repurchase agreements 62,086 30,605 33,847 62,582 30,370 Short-term borrowings 356,000 290,000 140,000 75,000 75,000 Long-term borrowings 117,043 19,442 21,810 34,101 31,874 Junior subordinated debt securities 45,619 45,619 45,619 90,619 90,619 Total shareholders’ equity 792,237 608,389 571,306 537,422 490,526
CONSOLIDATED STATEMENTS OF NET INCOME 10-K Form
Years Ended December 31, (dollars in thousands) 2015 2014 2013 2012 2011 Interest income $ 203,548 $ 160,523 $ 153,756 $ 156,251 $ 165,079 Interest expense 15,997 12,481 14,563 21,024 27,733 Provision for loan losses 10,388 1,715 8,311 22,815 15,609 Net Interest Income After Provision for Loan Losses 177,163 146,327 130,882 112,412 121,737 Noninterest income 51,033 46,338 51,527 51,912 44,057 Noninterest expense 136,717 117,240 117,392 122,863 103,908 Net Income Before Taxes 91,479 75,425 65,017 41,461 61,886 Provision for income taxes 24,398 17,515 14,478 7,261 14,622 Net Income $ 67,081 $ 57,910 $ 50,539 $ 34,200 $ 47,264 Preferred stock dividends and discount amortization ————7,611 Net Income Available to Common Shareholders $ 67,081 $ 57,910 $ 50,539 $ 34,200 $ 39,653
17 Item 6. SELECTED FINANCIAL DATA -- continued
SELECTED PER SHARE DATA AND RATIOS Refer to page 48 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.
December 31, 2015 2014 2013 2012 2011 Per Share Data Earnings per common share—basic $ 1.98 $ 1.95 $ 1.70 $ 1.18 $ 1.41 Earnings per common share—diluted 1.98 1.95 1.70 1.18 1.41 Dividends declared per common share 0.73 0.68 0.61 0.60 0.60 Dividend payout ratio 36.47% 34.89% 35.89% 50.75% 42.44% Common book value $ 22.76 $ 20.42 $ 19.21 $ 18.08 $ 17.44 Common tangible book value (non-GAAP) 14.26 14.46 13.22 12.32 11.46 Profitability Ratios Common return on average assets 1.13% 1.22% 1.12% 0.79% 0.97% Common return on average tangible assets (non- GAAP) 1.20% 1.28% 1.19% 0.85% 1.04% Common return on average equity 8.94% 9.71% 9.21% 6.62% 6.78% Common return on average tangible common equity (non-GAAP) 14.39% 14.02% 13.94% 10.35% 12.89% Capital Ratios Common equity/assets 12.54% 12.25% 12.60% 11.87% 11.91% Tangible common equity / tangible assets (non- GAAP) 8.24% 9.00% 9.03% 8.24% 8.14% Tier 1 leverage ratio 8.96% 9.80% 9.75% 9.31% 9.17% Common equity tier 1 9.77% 11.81% 11.79% 11.37% 10.98% Risk-based capital—tier 1 10.15% 12.34% 12.37% 11.98% 11.63% Risk-based capital—total 11.60% 14.27% 14.36% 15.39% 15.20% Asset Quality Ratios Nonaccrual loans/loans 0.70% 0.32% 0.63% 1.63% 1.79% Nonperforming assets/loans plus OREO 0.71% 0.33% 0.64% 1.66% 1.92% Allowance for loan losses/total portfolio loans 0.96% 1.24% 1.30% 1.38% 1.56% Allowance for loan losses/nonperforming loans 136% 385% 206% 85% 87% Net loan charge-offs/average loans 0.22% 0.00% 0.25% 0.78% 0.56%
18 Item 6. SELECTED FINANCIAL DATA -- continued
RECONCILIATIONS OF GAAP TO NON-GAAP RATIOS
December 31 (dollars in thousands) 2015 2014 2013 2012 2011 Common tangible book value (non-GAAP) Total shareholders' equity $ 792,237 $ 608,389 $ 571,306 537,422 $ 490,526 Less: goodwill and other intangible assets, net of deferred tax liability (296,005) (177,530) (178,264) (179,210) (168,996) Tangible common equity (non-GAAP) 496,232 430,859 393,042 358,212 321,530 Common shares outstanding 34,810 29,796 29,734 29,084 28,059 Common tangible book value (non-GAAP) $ 14.26 $ 14.46 $ 13.22 $ 12.32 $ 11.46 Common return on average tangible assets (non-GAAP) Net income $ 67,081 $ 57,910 $ 50,539 $ 34,200 $ 39,653 Plus: amortization of intangibles net of tax 1,182 734 1,034 1,111 1,129 Net income before amortization of intangibles 68,263 58,644 51,573 35,311 40,782 Total average assets (GAAP Basis) 5,942,098 4,762,363 4,505,792 4,312,538 4,072,608 Less: average goodwill and average other intangible assets, net of deferred tax liability (275,847) (177,881) (178,757) (175,501) (169,541) Tangible average assets (non-GAAP) $ 5,666,251 $ 4,584,482 $ 4,327,035 $ 4,137,037 $ 3,903,067 Common return on average tangible assets (non-GAAP) 1.20% 1.28% 1.19% 0.85% 1.04% Common return on average tangible common equity (non-GAAP) Net income $ 67,081 $ 57,910 $ 50,539 $ 34,200 $ 39,653 Plus: amortization of intangibles net of tax 1,182 734 1,034 1,111 1,129 Net income before amortization of intangibles 68,263 58,644 51,573 35,311 40,782 Total average shareholders’ equity (GAAP Basis) 750,069 596,155 548,771 516,812 585,186 Less: average goodwill, average other intangible assets and average preferred equity, net of deferred tax liability (275,847) (177,881) (178,757) (175,501) (268,755) Tangible average common equity (non-GAAP) $ 474,222 $ 418,274 $ 370,014 $ 341,311 $ 316,431
Common return on average tangible common 10-K Form equity (non-GAAP) 14.39% 14.02% 13.94% 10.35% 12.89% Tangible common equity/tangible assets (non- GAAP) Total shareholders' equity (GAAP basis) $ 792,237 $ 608,389 $ 571,306 $ 537,422 $ 490,526 Less: goodwill and other intangible assets and preferred equity, net of deferred tax liability (296,005) (177,530) (178,264) (179,211) (168,996) Tangible common equity (non-GAAP) 496,232 430,859 393,042 358,211 321,530 Total assets (GAAP basis) 6,318,354 4,964,686 4,533,190 4,526,702 4,119,994 Less: goodwill and other intangible assets and preferred equity, net of deferred tax liability (296,005) (177,530) (178,264) (179,211) (168,996) Tangible assets (non-GAAP) $ 6,022,349 $ 4,787,156 $ 4,354,926 $ 4,347,491 $ 3,950,998 Tangible common equity/tangible assets (non- GAAP) 8.24% 9.00% 9.03% 8.24% 8.14%
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 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.
19 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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 Report 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 and beliefs and assumptions made by management. These Future Factors are not guarantees of our future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. Future Factors include: • credit losses; • cyber-security concerns, including an interruption or breach in the security of our information systems; • rapid technological developments and changes; • sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; • a change in spreads on interest-earning assets and interest-bearing liabilities; • regulatory supervision and oversight, including Basel III required capital levels, and public policy changes, including environmental regulations; • legislation affecting the financial services industry as a whole, and S&T, in particular, including the effects of the Dodd- Frank Act; • the outcome of pending and future litigation and governmental proceedings; • increasing price and product/service competition, including new entrants; • the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; • managing our internal growth and acquisitions, particularly our recent acquisition of Integrity Bancshares, Inc., or Integrity; • the possibility that the anticipated benefits from the recent Integrity acquisition and any other future acquisitions cannot be fully realized in a timely manner or at all, or that integrating the operations of Integrity or future acquired operations will be more difficult, disruptive or costly than anticipated; • containing costs and expenses; • reliance on significant customer relationships; • general economic or business conditions, either nationally or regionally in our market areas, may be less favorable than expected, resulting in among other things, a reduced demand for credit and other services; • deterioration of the housing market and reduced demand for mortgages; • a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; • a re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally; and • access to capital in the amounts, at the times and on the terms required to support our future businesses.
These are representative of the Future Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general economic conditions, including interest rate fluctuations, and other Future Factors.
20 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Critical Accounting Policies and Estimates
Our Consolidated 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. 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 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 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 2015, 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 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. We 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 and may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: evaluation and impairment tests of individual loans and evaluation and impairment tests of certain groups of homogeneous loans with similar risk characteristics. We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. For all troubled debt restructurings, or TDRs, regardless of size, as 10-K Form 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 because most of our loans are collateral dependent. We obtain appraisals annually on impaired loans greater than $0.5 million. The ALL methodology for groups of homogeneous loans, or the 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, using a migration analysis where losses in each pool are aggregated over the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from when an event happens that causes the borrower to be unable to pay on a loan until the loss is confirmed through a loan charge-off. In conjunction with our annual review of the ALL assumptions, we have updated our analysis of LEPs for our Commercial and Consumer loan portfolio segments using our loan charge-off history. The analysis showed that the LEP for our Commercial and Industrial, or C&I, has shortened and our Commercial Real Estate, or CRE, and Commercial Construction portfolio segments have not changed. We estimate the LEP to be 2 years for C&I, compared to 2.5 years in the prior year, and 3.5 years for both CRE and Commercial Construction. Our analysis showed an LEP for Consumer Real Estate of 3.5 years and Other Consumer of 1.25 years. This compares to 2 years for both Consumer Real Estate and Other Consumer in the prior year when peer data was being utilized to estimate the LEP. We believe that our actual experience captured through our internal analysis better reflects the inherent risk in these portfolios compared to the peer data used in prior years. 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 all Commercial and Consumer portfolio segments in order to capture relevant historical
21 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued data believed to be reflective of losses inherent in the portfolios. We use 6.5 years for our LBP for all portfolio segments which encompasses our loss experience during the Great Recession and our more recent improved loss experience. 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 lending policies and practices, economic conditions, changes in the loan portfolio, changes in lending management, results of internal loan reviews, asset quality trends, collateral values, concentrations of credit risk and other external factors. 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 the total ALL. Lengthening the LBP 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. Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related ALL. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. In estimating the fair value of our acquired loans, we considered a number of factors including the loan term, internal risk rating, delinquency status, prepayment rates, recovery periods, estimated value of the underlying collateral and the current interest rate environment. Loans acquired with evidence of credit deterioration were evaluated and not considered to be significant. The premium or discount estimated through the loan fair value calculation is recognized into interest income on a level yield or straight-line basis over the remaining contractual life of the loans. Additional credit deterioration on acquired loans, in excess of the original credit discount embedded in the fair value determination on the date of acquisition, will be recognized in the ALL through the provision for loan losses. 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 methodology. This validation includes reviewing the loan segmentation, LEP, LBP and the qualitative framework. As a result of this ongoing monitoring process, we may make changes to our ALL 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 losses 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.
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 us 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 pre-tax income, tax credits and the applicable statutory tax rates expected for the full year. We determine deferred income tax assets and liabilities using the asset and liability method, and we 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’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.
22 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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. We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing service which provides us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. 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 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.
Goodwill and Other Intangible Assets
As a result of acquisitions, we have recorded goodwill and identifiable intangible assets in our Consolidated Balance Sheets. Goodwill represents the excess of the purchase price over the fair value of net assets 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 that 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 10-K Form of our services. As such, goodwill value is supported ultimately by profitability 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: Community Banking, Insurance and Wealth Management. The carrying value of goodwill is tested annually for impairment each October 1st or more frequently if it is determined that a triggering event has occurred. 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 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 that 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 2015, 2014 and 2013; the results indicated that the fair value of each reporting unit exceeded the carrying value. Based upon our qualitative assessment performed for our annual impairment analysis, we concluded that it 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 shown improvement over the past couple of years. 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 better asset quality, improved earnings and generally better stock prices. Activity in mergers and acquisitions demonstrated that there is premium value on banking franchises and a number of banks of our size have been able to access the capital markets over the past year. Our stock traded significantly above book value throughout 2015. Although our stock price has declined in 2016, the decline has been consistent with the overall decline in bank stocks and our stock price continues to
23 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued trade in excess of our book value per share. Additionally, our overall performance remains strong, 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 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 valuations at the time of acquisition. Intangible assets with finite useful lives, consisting primarily of core deposit and customer list intangibles, are amortized using straight-line or accelerated methods over their estimated weighted average useful lives, ranging from 10 to 20 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, 2015, 2014 and 2013. The financial services industry and securities markets can be adversely affected by declining values. If economic conditions result in a prolonged period of economic weakness in the future, our business segments, including the Community Banking segment, may be adversely affected. 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 occurs. Recent Accounting Pronouncements and Developments
Note 1 Summary of Significant Accounting Policies 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 $6.3 billion at December 31, 2015. We operate locations in Pennsylvania, Ohio and New York. We provide a full range of financial services with retail and commercial banking products, cash management services, insurance and trust and brokerage services. Our common stock trades on the NASDAQ Global Select Market under the symbol “STBA.” We earn revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provision for loan losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense. Our mission is to become the financial services provider of choice within the markets that we serve. We strive to do this by delivering exceptional service and value, one customer at a time. Our strategic plan focuses on organic growth, which includes growth within our current footprint and growth through market expansion. We also actively evaluate acquisition opportunities as another source of growth. Our strategic plan includes a collaborative model that combines expertise from all of our business segments and focuses on satisfying each customer’s individual financial objectives. Our major accomplishments during 2015 included: • Our 2015 net income increased $9.2 million, or 15.8 percent, to a record $67.1 million, or $1.98 per diluted share, compared to $57.9 million, or $1.95 per diluted share for 2014. Return on average assets was 1.13 percent and return on average equity was 8.94 percent for 2015. • On March 4, 2015, we completed a merger with Integrity, or the Merger, which expanded our geographic footprint into south-central Pennsylvania with eight branches in Cumberland, Dauphin, Lancaster and York Counties. The transaction was valued at $172.0 million and added total assets of $980.8 million, including $788.7 million in loans, $115.9 million in goodwill, and $722.3 million in deposits. Integrity Bank became a separate subsidiary of S&T upon completion of the Merger and was subsequently merged into S&T Bank on May 8, 2015. • During 2015, we successfully executed on our organic growth strategy in our current footprint and by expanding into new markets. On March 23, 2015, we expanded our commercial banking operations by opening a loan production office, or LPO, in western New York. We had organic loan growth of $370.2 million during 2015. • We opened two new branch innovation centers in 2015. On March 9, 2015, we opened the Indian Springs branch and on August 17, 2015 we opened the McCandless Crossings branch. Both branches feature a "tech bar" where customers can check their accounts on tablets, in-branch Wi-Fi and a configuration that replaces teller lines with pods where customers sit down with bank representatives to discuss services beyond traditional banking needs. • We remain focused on running our business efficiently. During 2015, we had positive operating leverage with total revenue growth of $44.2 million, or 23 percent, while operating expenses increased $19.5 million, or 17 percent compared to 2014. Our focus continues to be on loan and deposit growth and implementing opportunities to increase fee income while maintaining a strong expense discipline. With our recent expansion into new markets, we are focused on executing our strategy to successfully build our brand and grow our business in these markets. The low interest rate environment remains a challenge for our net interest income, but our organic growth will help to mitigate the impact. 24 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Results of Operations Year Ended December 31, 2015
Earnings Summary
Net income available to common shareholders increased $9.2 million, or 16 percent, to $67.1 million or $1.98 per share in 2015 compared to $57.9 million or $1.95 per share in 2014. Integrity's results have been included in our financial statements since the consummation of the Merger on March 4, 2015. The increase in net income was primarily due to an increase in net interest income of $39.5 million, or 27 percent, and noninterest income of $4.7 million, or 10 percent partially offset by increases in our provision for loan losses of $8.7 million, noninterest expenses of $19.5 million and our provision for income taxes of $6.9 million. Noninterest expense included $3.2 million of merger related expenses during the year ended December 31, 2015. Net interest income increased $39.5 million, or 27 percent, to $187.6 million compared to $148.0 million in 2014. The increase was primarily due to the increase in average interest-earning assets of $1.0 billion, or 24 percent, partially offset by an increase in average interest-bearing liabilities of $887 million, or 29 percent, compared to 2014. The increase in average interest-earning assets related to the Merger and our successful efforts in growing our loan portfolio organically during 2015. Net interest income was favorably impacted by accretion resulting from purchase accounting fair value adjustments related to the Merger of $6.2 million for 2015. Net interest margin, on a fully taxable-equivalent, or FTE, basis, increased to 3.56 percent in 2015 compared to 3.50 percent for 2014. The provision for loan losses increased $8.7 million to $10.4 million during 2015 compared to $1.7 million in 2014. The higher provision for loan losses was due to an increase in net loan charge-offs. Net loan charge-offs were $10.2 million, or 0.22 percent of average loans for 2015 compared to only $0.1 million, or 0.00 percent of average loans in 2014. During 2014, our net loan charge-offs and other asset quality metrics were at historically low levels resulting in an unusually low provision for loan losses. Total noninterest income increased $4.7 million, or 10 percent, to $51.0 million for 2015 compared to $46.3 million for 2014. The increase was primarily due to additional income as a result of the Merger, including higher mortgage banking income. Total noninterest expense increased $19.5 million to $136.7 million for 2015 compared to $117.2 million for 2014. Salaries and employee benefits increased $7.8 million during 2015 primarily due to additional employees, annual merit increases and higher pension and incentive expense. Additional increases were due to higher operating expenses resulting from the Merger and $3.2 million of merger related expenses. The provision for income taxes increased $6.9 million to $24.4 million compared to $17.5 million in 2014. The increase was primarily due to a $16.1 million increase in pretax income. 10-K Form
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 79 percent of operating revenue (net interest income plus noninterest income, excluding security gains/losses and non-recurring income and expenses) in 2015 and 76 percent of operating revenue in 2014. Refer to page 48 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 produce an acceptable level of net interest income. The interest income on interest-earning assets and the net interest margin are presented on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory tax rate of 35 percent for each period and the dividend-received deduction for equity securities. We believe this to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable amounts.
25 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 Comprehensive Income to net interest income and rates adjusted to a FTE basis for the periods presented:
Years Ended December 31, (dollars in thousands) 2015 2014 2013 Total interest income $ 203,549 $ 160,523 $ 153,756 Total interest expense 15,998 12,481 14,563 Net interest income per consolidated statements of net income 187,551 148,042 139,193 Adjustment to FTE basis 6,123 5,461 4,850 Net Interest Income (FTE) (non-GAAP) $ 193,674 $ 153,503 $ 144,043 Net interest margin 3.45 % 3.38 % 3.39 % Adjustment to FTE basis 0.11 0.12 0.11 Net Interest Margin (FTE) (non-GAAP) 3.56% 3.50% 3.50%
26 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:
2015 2014 2013 Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS Loans(1)(2) $ 4,692,433 $ 191,860 4.09 % $ 3,707,808 $ 150,531 4.06 % $ 3,448,529 $ 145,366 4.22 % Interest-bearing deposits with banks 66,101 165 0.25 % 93,645 234 0.25 % 167,952 444 0.26 % Taxable investment securities(3) 516,335 10,162 1.97 % 442,513 8,803 1.99 % 371,099 7,458 2.01 % Tax-exempt investment securities (2) 138,321 6,084 4.40 % 128,750 5,933 4.61 % 110,009 5,231 4.76 % Federal Home Loan Bank and other restricted stock 19,672 1,401 7.12 % 14,083 483 3.43 % 13,692 107 0.78 % Total Interest-earning Assets 5,432,862 209,672 3.86% 4,386,799 165,984 3.78% 4,111,281 158,606 3.86% Noninterest-earning assets: Cash and due from banks 56,655 50,255 51,534 Premises and equipment, net 46,794 36,115 37,087 Other assets 455,244 337,205 353,857 Less allowance for loan losses (49,457) (48,011) (47,967) Total Assets $ 5,942,098 $ 4,762,363 $ 4,505,792 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Interest-bearing demand $ 592,301 $ 770 0.13 % $ 321,907 $ 70 0.02 % $ 309,748 $ 75 0.02 % Money market 388,172 724 0.19 % 321,294 507 0.16 % 319,831 446 0.14 % Savings 1,072,683 1,712 0.16 % 1,033,482 1,607 0.16 % 1,001,209 1,735 0.17 % Certificates of deposit 1,093,564 8,439 0.77 % 905,346 7,165 0.79 % 973,339 8,918 0.92 %
Brokered deposits 376,095 1,299 0.35 % 226,169 780 0.34 % 81,112 232 0.29 % 10-K Form Total Interest-bearing deposits 3,522,815 12,944 0.37% 2,808,198 10,129 0.36% 2,685,239 11,406 0.42% Securities sold under repurchase agreements 44,394 4 0.01 % 28,372 2 0.01 % 54,057 62 0.12 % Short-term borrowings 257,117 932 0.36 % 164,811 511 0.31 % 101,973 279 0.27 % Long-term borrowings 83,648 790 0.94 % 20,571 617 3.00 % 24,312 746 3.07 %
Junior subordinated debt securities 47,071 1,328 2.82 % 45,619 1,222 2.68 % 65,989 2,070 3.14 %
Total Interest-bearing Liabilities 3,955,045 15,998 0.40% 3,067,571 12,481 0.41% 2,931,570 14,563 0.50% Noninterest-bearing liabilities: Noninterest-bearing demand 1,170,011 1,046,606 955,475 Other liabilities 66,973 52,031 69,976 Shareholders’ equity 750,069 596,155 548,771 Total Liabilities and Shareholders’ Equity $ 5,942,098 $ 4,762,363 $ 4,505,792 Net Interest Income(2)(3) $ 193,674 $ 153,503 $ 144,043 Net Interest Margin(2)(3) 3.56% 3.50% 3.50% (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on a FTE basis using the statutory federal corporate income tax rate of 35 percent for 2015, 2014 and 2013. (3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
27 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:
2015 Compared to 2014 2014 Compared to 2013 Increase (Decrease) Due to Increase (Decrease) Due to
(dollars in thousands) Volume(4) Rate(4) Net Volume(4) Rate(4) Net Interest earned on: Loans(1)(2) $ 39,974 $ 1,355 $ 41,329 $ 10,929 $ (5,764) $ 5,165 Interest-bearing deposits with bank (69) — (69) (198) (12) (210) Taxable investment securities(3) 1,468 (109) 1,359 1,449 (104) 1,345 Tax-exempt investment securities(2) 441 (290) 151 891 (189) 702 Federal Home Loan Bank and other restricted stock 192 726 918 3 374 377 Total Interest-earning Assets 42,006 1,682 43,688 13,074 (5,695) 7,379 Interest paid on: Interest-bearing demand $ 59 $ 641 $ 700 $ 3 $ (8) $ (5) Money market 105 112 217 2 59 61 Savings 61 44 105 56 (184) (128) Certificates of deposit 1,489 (215) 1,274 (623) (1,130) (1,753) Brokered deposits 517 2 519 415 133 548 Securities sold under repurchase agreements 2 — 2 (30) (29) (59) Short-term borrowings 287 134 421 172 60 232 Long-term borrowings 1,893 (1,720) 173 (115) (14) (129) Junior subordinated debt securities 39 67 106 (639) (209) (848) Total Interest-bearing Liabilities 4,452 (935) 3,517 (759) (1,322) (2,081) Net Change in Net Interest Income $ 37,554 $ 2,617 $ 40,171 $ 13,833 $ (4,373) $ 9,460 (1) Nonaccruing loans are included in the daily average loan amounts outstanding. (2) Tax-exempt income is on a FTE basis using the statutory federal corporate income tax rate of 35 percent for 2015, 2014 and 2013. (3) Taxable investment income is adjusted for the dividend-received deduction for equity securities. (4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.
Net interest income on a FTE basis increased $40.2 million, or 26.2 percent, to $193.7 million compared to $153.5 million in 2014. Net interest margin on a FTE basis increased six basis points to 3.56 percent for 2015 compared to 3.50 percent compared to 2014. Net interest income was favorably impacted by accretion resulting from purchase accounting fair value adjustments related to the Merger of $6.2 million for 2015. This impacted net interest margin on a FTE basis by 12 basis points for 2015. Interest income on a FTE basis increased $43.7 million, or 26.3 percent, compared to 2014. Average interest-earning assets increased $1.0 billion, or 23.8 percent, compared to 2014, mainly attributable to higher loan balances related to the Merger and organic growth. The rate earned on loans increased three basis points to 4.09 percent compared to 4.06 percent to the prior year. The rate was favorably impacted by purchase accounting accretion related to the Merger of $4.9 million, or 11 basis points, which was offset by the continued pressure on loan rates in the current environment. Average interest-bearing deposits with banks, which is primarily cash at the Board of Governors of the Federal Reserve, or Federal Reserve, decreased $27.5 million while average investment securities increased $83.4 million compared to 2014. Federal Home Loan Bank, or FHLB, and other restricted stock, increased $5.6 million compared to 2014 with a significant increase in the rate, primarily due to a special dividend received of $0.3 million during 2015. The FTE rate on total interest-earning assets increased eight basis points to 3.86 percent compared to 3.78 percent for 2014. The $4.9 million loan purchase accounting accretion had a positive impact on the interest-earning asset rate of ten basis points. Interest expense increased $3.5 million to $16.0 million for 2015 as compared to $12.5 million for 2014. The increase in interest expense was mainly driven by an increase in average deposits of $714.6 million, primarily related to the Merger. Average interest-bearing customer deposits, which excludes brokered deposits, increased $564.7 million. Average brokered deposits increased $149.9 million and average borrowings increased $172.9 million compared to 2014 to fund strong loan growth during 2015. At December 31, 2015, average long-term borrowings increased $63.1million compared to December 31, 2014, as a result of shifting $100.0 million of short-term borrowings to a long-term variable rate borrowing in the second quarter of 2015. Overall, the cost of interest-bearing liabilities decreased one basis point to 0.40 percent compared to 0.41 percent for 2014. Deposit purchase accounting adjustments related to the Merger of $1.3 million positively impacted the cost of interest-bearing liabilities by three basis points.
28 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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 increased $8.7 million to $10.4 million for 2015 compared to $1.7 million for 2014. This increase in the provision is primarily related to an increase in loan charge-offs compared to the prior year. Net charge-offs were $10.2 million, or 0.22 percent of average loans in 2015, compared to $0.1 million, or 0.00 percent of average loans in 2014. Net loan charge-offs of $0.1 million in 2014 were unusually low. Approximately $6.0 million of net charge-offs during 2015 related to loans acquired in the Merger, primarily due to four relationships that experienced credit deterioration subsequent to the acquisition date. Total nonperforming loans increased to $35.4 million, or 0.70 percent of total loans at December 31, 2015, compared to $12.5 million, or 0.32 percent of total loans at December 31, 2014. The increase in nonperforming loans primarily related to acquired loans from the Merger that experienced credit deterioration subsequent to the acquisition date. Special mention and substandard commercial loans increased $71.3 million to $183.5 million from $112.2 million at December 31, 2014, primarily related to the Merger. The ALL at December 31, 2015, was $48.1 million, or 0.96 percent of total portfolio loans, compared to $47.9 million, or 1.24 percent of total portfolio loans at December 31, 2014. The decrease in the overall level of the reserve as a percentage to total portfolio loans is partly due to the Merger as the acquired loans were recorded at fair value with no carry over of the ALL. The ALL as a percentage of originated loans was 1.10 percent at December 31, 2015. 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) 2015 2014 $ Change % Change Securities gains, net $ (34) $ 41 $ (75) NM Debit and credit card fees 12,113 10,781 1,332 12.4 % Service charges on deposit accounts 11,642 10,559 1,083 10.3 % Wealth management fees 11,444 11,343 101 0.9 % Insurance fees 5,500 5,955 (455) (7.6)% Mortgage banking 2,554 917 1,637 178.5 %
Other Income: 10-K Form BOLI income 2,221 1,773 448 25.3 % Letter of credit origination fees 1,242 1,017 225 22.1 % Interest rate swap fees 577 440 137 31.1 % Other 3,774 3,512 262 7.5 % Total Other Noninterest Income 7,814 6,742 1,072 15.9 % Total Noninterest Income $ 51,033 $ 46,338 $ 4,695 10.1 % NM- percentage not meaningful
Noninterest income increased $4.7 million, or 10.1 percent, in 2015 compared to 2014, with increases in almost all noninterest income categories. Various categories of noninterest income were positively impacted by the Merger which closed on March 4, 2015. Mortgage banking income increased $1.6 million in 2015 compared to 2014 due to an increase in the volume of loans originated for sale in the secondary market, in part due to the Merger, and more favorable pricing on loan sales. Debit and credit card fees increased $1.3 million due to the Merger and reversal of a $0.5 million customer rewards program liability related to the planned strategic repositioning of the credit card portfolio. Service charges on deposit accounts increased $1.1 million due to the Merger and due to fee increases in the second half of 2014. The increases in BOLI income and letter of credit origination fees were primarily related to the Merger. Insurance fees decreased $0.5 million primarily due to increased competition and a decline in customers in the energy sector due to industry consolidation.
29 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Noninterest Expense
Years Ended December 31, (dollars in thousands) 2015 2014 $ Change % Change Salaries and employee benefits $ 68,252 $ 60,442 $ 7,810 12.9 % Net occupancy 10,652 8,211 2,441 29.7 % Data processing 9,677 8,737 940 10.8 % Furniture and equipment 6,093 5,317 776 14.6 % Marketing 4,224 3,316 908 27.4 % Other taxes 3,616 2,905 711 24.5 % FDIC insurance 3,416 2,436 980 40.2 % Professional services and legal 3,365 3,717 (352) (9.5)% Merger related expense 3,167 689 2,478 359.7 % Other expenses: Joint venture amortization 3,615 4,054 (439) (10.8)% Loan related expenses 2,938 2,579 359 13.9 % Telecommunications 2,653 2,220 433 19.5 % Supplies 1,493 1,161 332 28.6 % Amortization of intangibles 1,818 1,129 689 61.0 % Postage 1,262 1,058 204 19.3 % Other 10,476 9,269 1,207 13.0 % Total Other Noninterest Expense 24,255 21,470 2,785 13.0 % Total Noninterest Expense $ 136,717 $ 117,240 $ 19,477 16.6 %
Noninterest expense increased $19.5 million, or 16.6 percent, to $136.7 million, for the year ended December 31, 2015 compared to 2014. The increase was due in part to higher operating expenses related to the Merger which closed on March 4, 2015 and $3.2 million of merger related expenses. In 2015, we incurred merger related expenses of $3.2 million compared to $0.7 million in 2014. These expenses included $1.3 million for data processing contract termination and conversion costs, $1.2 million in legal and professional expenses, $0.4 million in severance payments and $0.3 million in various other expenses. Salaries and employee benefits increased $7.8 million during 2015 primarily due to additional employees, annual merit increases and higher pension and incentive expense. Approximately $4.1 million of the increase related to the addition of new employees resulting from the Merger. Annual merit increases resulted in $1.6 million of additional salary expense. Pension expense increased $1.0 million due to a change in actuarial assumptions used to calculate our pension liability. Incentive expense increased $1.3 million due to a higher number of participants and strong performance in 2015. Operating expenses increased in 2015 compared to 2014 due to the Merger. The increase of $2.4 million in net occupancy expense and $0.8 million in furniture and equipment expense compared to 2014 was due to additional locations acquired as part of the Merger, as well as additional expenses related to our newer locations, including our LPO in central Ohio, our branches in Indiana and McCandless and our training and operations center. Other noninterest expense increased $1.2 million primarily due to training and travel related to the Merger and our expansion efforts. FDIC insurance increased $1.0 million, other taxes increased $0.7 million and amortization of intangibles increased $0.7 million all related to the Merger. The increase of $0.9 million in data processing expense in 2015 primarily related to an increased customer processing base due to the Merger and growth in digital channels. The increase in marketing expense of $0.9 million is due to additional marketing promotions. 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 56 percent for 2015 and 59 percent for 2014. Refer to page 48 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 $24.4 million in 2015 compared to $17.5 million in 2014. The effective tax rate, which is the provision for income taxes as a percentage of pretax income was 26.7 percent in 2015 compared to 23.2 percent in 2014. 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 $16.1 million in pre-tax income. 30 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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 FTE 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 six percent, due to new business development efforts and certain fee increases. Total noninterest expense decreased $0.2 million to $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 a $0.8 million decrease in other taxes due to legislative changes that resulted in a reduction in Pennsylvania shares tax. These decreases were offset by relatively small increases in various expense items in numerous categories. The provision for income taxes increased $3.0 million to $17.5 million compared to $14.5 million in 2013. The increase is primarily due to a $10.4 million increase in pretax income. 10-K Form
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 in 2014 and 74 percent of operating revenue in 2013. Refer to page 48 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 ALCO in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to maintain an acceptable net interest margin on interest-earning assets. The interest income on interest-earning assets and the net interest margin are presented on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory tax rate of 35 percent for each period and the dividend-received deduction for equity securities. We believe this measure to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable amounts.
31 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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 expense 12,481 14,563 21,024 Net interest income per consolidated statements of net income 148,042 139,193 135,227 Adjustment to FTE basis 5,461 4,850 4,471 Net Interest Income (FTE) (non-GAAP) $ 153,503 $ 144,043 $ 139,698 Net interest margin 3.38 % 3.39 % 3.45 % Adjustment to FTE basis 0.12 % 0.11 % 0.12 % Net Interest Margin (FTE) (non-GAAP) 3.50% 3.50% 3.57%
32 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 Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate 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 banks 93,645 234 0.25 % 167,952 444 0.26 % 289,947 718 0.25 % Taxable investment securities(3) 442,513 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 stock 14,083 483 3.43 % 13,692 107 0.78 % 17,945 37 0.21 % Total Interest-earning Assets 4,386,799 165,984 3.78% 4,111,281 158,606 3.86% 3,907,775 160,722 4.10% Noninterest-earning assets: Cash and due from banks 50,255 51,534 53,517 Premises and equipment, net 36,115 37,087 38,460 Other assets 337,205 353,857 361,982 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 market 321,294 507 0.16 % 319,831 446 0.14 % 308,719 528 0.17 % Savings 1,033,482 1,607 0.16 % 1,001,209 1,735 0.17 % 902,889 2,356 0.26 %
Certificates of deposit 905,346 7,165 0.79 % 973,339 8,918 0.92 % 1,078,945 13,715 1.27 % 10-K Form Brokered deposits 226,169 780 0.34 % 81,112 232 0.29 % 25,317 51 0.20 % Total Interest-bearing deposits 2,808,198 10,129 0.36% 2,685,239 11,406 0.42% 2,622,864 16,796 0.64% Securities sold under repurchase agreements 28,372 2 0.01 % 54,057 62 0.12 % 47,388 82 0.17 % Short-term borrowings 164,811 511 0.31 % 101,973 279 0.27 % 50,212 123 0.24 % Long-term borrowings 20,571 617 3.00 % 24,312 746 3.07 % 33,841 1,107 3.26 % Junior subordinated debt securities 45,619 1,222 2.68 % 65,989 2,070 3.14 % 90,619 2,916 3.21 % Total Interest-bearing Liabilities 3,067,571 12,481 0.41% 2,931,570 14,563 0.50% 2,844,924 21,024 0.74% Noninterest-bearing liabilities: Noninterest-bearing demand 1,046,606 955,475 877,056 Other liabilities 52,031 69,976 73,746 Shareholders’ equity 596,155 548,771 516,812 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.
33 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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:
2014 Compared to 2013 2013 Compared to 2012 Increase (Decrease) Due to Increase (Decrease) Due to (dollars in thousands) 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 stock 3 374 377 (8) 78 70 Total Interest-earning Assets 13,074 (5,695) 7,379 13,267 (15,383) (2,116) Interest paid on: Interest-bearing demand $ 3 $ (8) $ (5) $ 1 $ (72) $ (71) Money market 2 59 61 19 (101) (82) Savings 56 (184) (128) 257 (878) (621) Certificates of deposit (623) (1,130) (1,753) (1,343) (3,454) (4,797) Brokered deposits 415 133 548 112 69 181 Securities sold under repurchase agreements (30) (29) (59) 12 (32) (20) Short-term borrowings 172 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 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 eight 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 six 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 nine basis points to 0.41 percent in 2014 as compared to 0.50 percent in 2013.
34 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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 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 fees 11,343 10,696 647 6.0 % Debit and credit card fees 10,781 10,931 (150) (1.4)% Service charges on deposit accounts 10,559 10,488 71 0.7 % Insurance fees 5,955 6,248 (293) (4.7)% Gain on sale of merchant card servicing business — 3,093 (3,093) — % Mortgage banking 917 2,123 (1,206) (56.8)% Other Income: BOLI income 1,773 1,856 (83) (4.5)% Letter of credit origination fees 1,017 1,098 (81) (7.4)% Interest rate swap fees 440 1,012 (572) (56.5)% Other 3,512 3,977 (465) (11.7)% Total Other Noninterest Income 6,742 7,943 (1,201) (15.1)% Total Noninterest Income $ 46,338 $ 51,527 $ (5,189) (10.1)% om10-K Form 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.
35 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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 processing 8,737 8,263 474 5.7 % Net occupancy 8,211 8,018 193 2.4 % Furniture and equipment 5,317 4,883 434 8.9 % Professional services and legal 3,717 4,184 (467) (11.2)% Marketing 3,316 2,929 387 13.2 % Other taxes 2,905 3,743 (838) (22.4)% FDIC insurance 2,436 2,772 (336) (12.1)% Merger related expense 689 838 (149) (17.8)% Other expenses: Joint venture amortization 4,054 4,095 (41) (1.0)% Loan related expenses 2,579 2,432 147 6.0 % Telecommunications 2,220 1,691 529 31.3 % Supplies 1,161 1,130 31 2.7 % Amortization of intangibles 1,129 1,591 (462) (29.0)% Postage 1,058 970 88 9.1 % Other 9,269 9,006 263 2.9 % Total Other Noninterest Expense 21,470 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 for one of those acquisitions being fully amortized at the end of 2013. Our efficiency ratio was 59 percent for 2014 and 60 percent for 2013. Refer to page 48 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 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.
36 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Financial Condition December 31, 2015
Total assets increased $1.3 billion, or 27.3 percent, to $6.3 billion as of December 31, 2015 compared to $5.0 billion at December 31, 2014 primarily due to the increase in total portfolio loans of $1.2 billion, or 30.0 percent. We acquired $788.7 million of loans from the Merger and $370.1 million of loans from organic growth as a result of market expansion through our LPOs and increased activity in our existing footprint. Our commercial loan portfolio grew by $944.4 million, or 32.6 percent, to $3.8 billion with $608.2 million related to the merger, while our consumer loan portfolio increased $214.5 million, or 22.0 percent, to $1.2 billion with $180.5 million related to the merger. Securities increased $20.7 million compared to December 31, 2014 primarily due to normal investing activity. Our deposit base increased $1.0 billion, or 24.8 percent, with total deposits of $4.9 billion at December 31, 2015 compared to $3.9 billion at December 31, 2014. The increase in deposits primarily consisted of $722.3 million of deposits added from the Merger and an increase of $196.5 million in brokered deposits. Total borrowings increased $195.1 million, or 50.6 percent, as compared to 2014 primarily to fund our asset growth in 2015. Total shareholders’ equity increased $183.8 million, or 30.2 percent, compared to December 31, 2014 primarily due to $142.5 million of common stock issued in the Merger and net income of $67.1 million offset by $24.5 million in dividends.
Securities Activity
The balances and average rates of our securities are presented below as of December 31:
2015 2014 2013 Weighted- Weighted- Weighted- Average Average Average (dollars in thousands) Balance Yield Balance Yield Balance Yield U.S. Treasury securities $ 14,941 1.24 % $ 14,880 1.24 % $ — — % Obligations of U.S. government corporations and agencies 263,303 1.65 % 269,285 1.65 % 234,751 1.52 % Collateralized mortgage obligations of U.S. government corporations and agencies 128,835 2.26 % 118,006 2.28 % 63,774 2.38 % Residential mortgage-backed securities of U.S. government corporations and agencies 40,125 2.76 % 46,668 2.87 % 48,669 3.02 % Commercial mortgage-backed securities of U.S.
government corporations and agencies 69,204 2.12 % 39,673 1.94 % 39,052 1.95 % 10-K Form Obligations of states and political subdivisions (1) 134,886 4.19 % 142,702 4.36 % 114,264 4.54 % Marketable equity securities 9,669 3.90 % 9,059 4.08 % 8,915 4.14 % Total Securities Available-for-Sale $ 660,963 2.43% $ 640,273 2.50% $ 509,425 2.53% (1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 35%.
We invest in various securities in order to provide a source of liquidity, 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 level of liquidity available to us. Security purchases are subject to an investment policy approved annually by our Board of Directors and administered through ALCO and our treasury function. The securities portfolio increased $20.7 million, or 3.2 percent, from December 31, 2014. The increase is primarily due to normal purchase activity. We acquired $11.5 million of securities through the Merger and all of those acquired securities were sold during the quarter ended June 30, 2015. Management evaluates the securities portfolio for OTTI on a quarterly basis. At December 31, 2015, our bond portfolio was in a net unrealized gain position of $8.1 million, compared to net unrealized gain position of $9.3 million at December 31, 2014. At December 31, 2015, total gross unrealized gains were $9.8 million offset by total gross unrealized losses of $1.7 million. Total gross unrealized gains of $11.2 million were offset by total gross unrealized losses of $1.8 million at December 31, 2014. The increase in the value of our securities portfolio was a result of the changing interest rate environment in 2015. Unrealized losses were not related to the underlying credit quality of the bond portfolio. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the securities. There were no unrealized losses on marketable equity securities as of December 31, 2015. We do not intend to sell and it is more likely than not that we will not be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost. We did not record any OTTI in 2015, 2014 and 2013. The performance of the debt and equity securities markets could generate impairments in future periods requiring realized losses to be reported.
37 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, 2015 and the weighted average yields of such securities. Taxable-equivalent adjustments (using a 35 percent federal income tax rate) for 2015 have been made in calculating yields on obligations of state and political subdivisions.
Maturing After After Within One But Within Five But Within After No Fixed One Year Five Years Ten Years Ten Years Maturity (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Available-for-Sale U.S. Treasury securities $ — — % $ 14,941 1.24 % $ — — % $ — — % $ — — % Obligations of U.S. government corporations and agencies 45,212 1.54 % 197,796 1.62 % 20,295 2.20 % — — % — —% Collateralized mortgage obligations of U.S. government corporations and agencies — — % — — % 37,952 2.52 % 90,883 2.16 % — —% Residential mortgage-backed securities of U.S. government corporations and agencies — — % 1,813 4.37 % 3,545 5.18 % 34,767 2.44 % — —% Commercial mortgage-backed securities of U.S. government corporations and agencies — — % 39,193 1.95 % 30,011 2.77 % — — — —% Obligations of states and political subdivisions (1) 1,298 8.57 % 11,597 3.93 % 38,498 3.97 % 83,493 4.33 % — —% Marketable equity securities — — % — — % — — % — — % 9,669 4.08 % Total $ 46,510 $ 265,340 $ 130,301 $ 209,143 $ 9,669 Weighted Average Yield 2.43% 1.77% 2.87% 3.07% 4.08% (1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 35 percent.
Lending Activity
The following table summarizes our loan portfolio as of December 31:
2015 2014 2013 2012 2011 (dollars in % of % of % of % of % of thousands) Amount Total Amount Total Amount Total Amount Total Amount Total Commercial Commercial real estate $ 2,166,603 43.09 % $ 1,682,236 43.48 % $ 1,607,756 45.09 % $ 1,452,133 43.39 % $ 1,415,333 45.22 % Commercial and industrial 1,256,830 25.00 % 994,138 25.70 % 842,449 23.62 % 791,396 23.65 % 685,753 21.91 % Commercial construction 413,444 8.22 % 216,148 5.59 % 143,675 4.03 % 168,143 5.02 % 188,852 6.04 % Total Commercial Loans 3,836,877 76.32% 2,892,522 74.77% 2,593,880 72.74% 2,411,672 72.06% 2,289,938 73.17% Consumer
Residential mortgage 639,372 12.72 % 489,586 12.65 % 487,092 13.66 % 427,303 12.77 % 358,846 11.47 % Home equity 470,845 9.37 % 418,563 10.82 % 414,195 11.61 % 431,335 12.89 % 411,404 13.14 % Installment and other consumer 73,939 1.47 % 65,567 1.69 % 67,883 1.90 % 73,875 2.21 % 67,131 2.14 % Consumer construction 6,579 0.13 % 2,508 0.06 % 3,149 0.09 % 2,437 0.07 % 2,440 0.08 %
Total Consumer Loans 1,190,735 23.68% 976,224 25.23% 972,319 27.26% 934,950 27.94% 839,821 26.83%
Total Portfolio Loans $ 5,027,612 100.00% $ 3,868,746 100.00% $ 3,566,199 100.00% $ 3,346,622 100.00% $ 3,129,759 100.00%
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.
38 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued 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. The General Lending Policy is formulated by management and reviewed and ratified annually by the Board of Directors. Total portfolio loans increased $1.2 billion, or 30.0 percent, since December 31, 2014, to $5.0 billion at December 31, 2015. The increase was primarily due to the addition of $788.7 million of loans from the Merger and $370.2 million of organic growth. The $788.7 million of loans acquired in the Merger consisted of $331.6 million of CRE, $184.2 million of C&I, $92.4 million of commercial construction, $116.9 million of residential mortgage, $25.6 million of home equity, $36.1 million of installment and other consumer and $1.9 million of consumer construction. Organic loan growth was strong across all of our commercial portfolios and in our residential mortgage portfolio with total organic growth of $370.2 million during 2015. Almost 60 percent of our total organic loan growth, or $219.6 million, was from our newer markets in Ohio and New York. Further driving loan growth was the expansion of our sales team with the addition of commercial lenders in various markets. Commercial loans, including CRE, C&I and commercial construction, comprised 76 percent and 75 percent of total portfolio loans at December 31, 2015 and 2014. 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 65-80 percent. At December 31, 2015, variable commercial loans were 77 percent of the total commercial loans compared to 79 percent in 2014. Total commercial loans have increased $944.4 million, or 32.6 percent, from December 31, 2014 with growth in all portfolios. CRE loans increased $484.4 million, or 28.8 percent, with $331.6 million of the growth from the Merger and $152.8 of organic growth. C&I loans increased $262.7 million, or 26.4 percent, with $184.2 million of growth from the Merger and $78.5 million of organic growth. Commercial construction loans increased $197.3 million, or 91.3 percent, with $92.4 million related to the Merger and $104.9 million of organic growth. Consumer loans represent 24 percent of our loan portfolio at December 31, 2015 compared to 25 percent at December 31, 2014. Total consumer loans have increased $214.5 million, or 22.0 percent, from December 31, 2014 with $180.5 million of the increase due to the Merger and $34.0 million of organic growth. The residential mortgage portfolio increased $149.8 million, or 30.1 percent, with $116.9 million of growth from the Merger and $32.9 million of organic growth. Residential mortgage lending continues to be a focus through a centralized mortgage origination department, secondary market activities and the utilization of commission compensated originators. Management believes that continued adherence to our conservative mortgage lending policies for portfolio loans will be as important in a growing economy as it was during the downturn in recent years. The LTV policy guideline is 80 percent for residential first lien mortgages. Higher LTV loans may be approved with the appropriate private mortgage insurance coverage. We primarily limit our fixed rate portfolio loans to a maximum term of 20 years for traditional mortgages, and 15 years with a maximum amortization term of 30 years for balloon payment mortgages. We may originate home equity loans with a lien 10-K Form position that is second to unrelated third party lenders, but normally only to the extent that the combined LTV considering both the first and second liens does not exceed 100 percent of the fair value of the property. Combo mortgage loans consisting of a residential first mortgage and a home equity second mortgage are also available. We originate and sell loans into the secondary market, primarily to Fannie Mae. We sell these loans in order 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 2015 and 2014, we sold $77.2 million and $40.1 million, of 1-4 family mortgages to Fannie Mae. In addition, we service $361.2 million of secondary market mortgage loans that we originated at December 31, 2015 compared to $327.2 million at December 31, 2014. Loans sold to Fannie Mae in 2015 increased compared to 2014 due to the Merger and increased organic volume. We also offer a variety of unsecured and secured consumer loan and credit card products. LTV guidelines for direct loans are generally 90-100 percent of invoice for new automobiles and 80-90 percent of National Automobile Dealer Association value for used automobiles.
39 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued The following table presents the maturity of consumer and commercial loans outstanding as of December 31, 2015:
Maturity After One But Within Five (dollars in thousands) Within One Year Years After Five Years Total Fixed interest rates $ 166,815 $ 449,217 $ 263,745 $ 879,777 Variable interest rates 760,095 836,737 1,360,268 2,957,100 Total Commercial Loans $ 926,910 $ 1,285,954 $ 1,624,013 $ 3,836,877 Fixed interest rates 76,320 224,871 292,295 593,486 Variable interest rates 371,995 53,142 172,112 597,249 Total Consumer Loans $ 448,315 $ 278,013 $ 464,407 $ 1,190,735 Total Portfolio Loans $ 1,375,225 $ 1,563,967 $ 2,088,420 $ 5,027,612
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 or 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. The Loan Review function 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.
40 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Nonperforming assets, or NPAs, consist of nonaccrual loans, nonaccrual TDRs and OREO. The following represents NPAs for the years presented:
(dollars in thousands) 2015 2014 2013 2012 2011 Nonperforming Loans Commercial real estate $ 5,171 $ 2,255 $ 6,852 $ 20,972 $ 20,777 Commercial and industrial (1) 7,709 1,266 1,412 5,496 7,570 Commercial construction 7,488 105 34 1,454 3,604 Residential mortgage 4,964 1,877 1,982 4,526 2,859 Home equity 2,379 1,497 2,073 3,312 2,936 Installment and other consumer 12 21 34 40 4 Consumer construction — — — 218 181 Total Nonperforming Loans (1) 27,723 7,021 12,387 36,018 37,931 Nonperforming Troubled Debt Restructurings Commercial real estate 3,548 2,180 3,898 9,584 10,871 Commercial and industrial 1,570 356 1,884 939 — Commercial construction 1,265 1,869 2,708 5,324 2,943 Residential mortgage 665 459 1,356 2,752 4,370 Home Equity 523 562 218 341 — Installment and other consumer 88 10 3 — — Total Nonperforming Troubled Debt Restructurings 7,659 5,436 10,067 18,940 18,184 Total Nonperforming Loans (1) 35,382 12,457 22,454 54,958 56,115 OREO 354 166 410 911 3,967 Total Nonperforming Assets (1) $ 35,736 $ 12,623 $ 22,864 $ 55,869 $ 60,082 Nonperforming loans as a percent of total loans (1) 0.70% 0.32% 0.63% 1.63% 1.79% Nonperforming assets as a percent of total loans plus OREO(1) 0.71% 0.33% 0.64% 1.66% 1.92%
(1)Subsequent to releasing our earnings for the fourth quarter of 2015 on January 26, 2016, we obtained new information regarding the collectability of a $4.7 million C&I loan. The loan is now classified as an impaired loan, with no required reserve, and as a nonperforming loan. We previously reported in our fourth quarter of 2015 earnings release nonperforming loans of $30.7 million, total NPA's of $31.0 million, nonperforming loans as a percentage of total
gross loans of 0.61 percent, NPA's to total gross loans plus OREO of 0.61 percent and ALL to nonperforming loans of 157 percent. Even though the 10-K Form information regarding the collectability of this loan did not become available to us until after the release of our earnings for the fourth quarter of 2015, GAAP requires that this information be reflected in our audited Consolidated Financial Statements for 2015 and related disclosures. Thus, revised amounts and ratios are included within this Form 10-K.
Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due. There were no loans 90 days or more past due and still accruing at December 31, 2015 or December 31, 2014. NPAs increased $23.1 million to $35.7 million at December 31, 2015 compared to $12.6 million at December 31, 2014. NPAs were at historically low levels in 2014. The increase in NPAs during 2015 was primarily due to credit deterioration on acquired loans since the acquisition date and a $4.7 million C&I loan. Included in the total NPAs of $35.7 million was approximately $16.2 million of loans from the Merger all of which became 90 days past due subsequent to the merger date. TDRs are loans where we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual there may be instances of principal forgiveness. Generally these concessions are for a period of at least six months. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed by the borrower as TDRs. TDRs can be returned to accruing status if the following criteria are met: 1) the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and 2) there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring. All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining lives, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and we fully expect that the remaining principal and interest will be collected according to the restructured agreement. All impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements noted above to be returned to accruing status.
41 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued As an example, consider a substandard commercial construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time. The post- modification interest rate is not increased to correspond with the current credit risk of the borrower and all other terms remain the same according to the original loan agreement. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted. The loan will be reported as nonaccrual and as an impaired loan and a TDR. In addition, the loan could be charged down to the fair value of the collateral if a confirmed loss exists. If the loan subsequently performs, by means of making on-time principal and interest payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR. The loan will remain an impaired loan for the remaining life of the loan because the interest rate was not adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk. As of December 31, 2015, we had $31.6 million in total TDRs, including $24.0 million that were performing and $7.6 million that were nonperforming. This is a decrease from December 31, 2014 when we had $42.4 million in TDRs, including $37.0 million that were performing and $5.4 million that were nonperforming. The $10.8 million decrease in total TDRs is primarily due to principal reductions during 2015. Loan modifications resulting in TDRs increased in 2015 with 60 modifications or $8.3 million of new TDRs compared to 44 modifications or $4.9 million of new TDRs in 2014. Included in the 2015 new TDRs were 32 loans totaling $1.2 million related to Chapter 7 bankruptcy filings that were not reaffirmed resulting in discharged debt which compares to 29 loans totaling $1.1 million in 2014. For the year ended December 31, 2015 we had eight TDRs for $0.4 million that met the above requirements for being returned to performing status compared to nine TDRs for $1.9 million during 2014.
The following represents delinquency as of December 31:
2015 2014 2013 2012 2011 % of % of % of % of % of (dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans 90 days or more: Commercial real estate $ 8,719 0.40 % $ 4,435 0.26 % $ 10,750 0.67 % $ 30,556 2.10 % $ 31,648 2.24 % Commercial and Industrial 9,279 0.74 % 1,622 0.16 % 3,296 0.39 % 6,435 0.81 % 7,570 1.10 % Commercial construction 8,753 2.12 % 1,974 0.91 % 2,742 1.91 % 6,778 4.03 % 6,547 3.47 % Residential mortgage 5,629 0.88 % 2,336 0.48 % 3,338 0.69 % 7,278 1.70 % 7,229 2.01 % Home equity 2,902 0.62 % 2,059 0.49 % 2,291 0.55 % 3,653 0.85 % 2,936 0.71 % Installment and other consumer 100 0.14 % 31 0.05 % 37 0.05 % 40 0.05 % 4 0.01 % Consumer construction — — % — — % — — % 218 8.95 % 181 7.42 % Total Loans $ 35,382 0.70% $ 12,457 0.32% $ 22,454 0.63% $ 54,958 1.64% $ 56,115 1.79% 30 to 89 days: Commercial real estate $ 12,229 0.56 % $ 2,871 0.17 % $ 1,416 0.09 % $ 2,643 0.18 % $ 9,105 0.64 % Commercial and industrial 2,749 0.22 % 1,380 0.14 % 2,877 0.34 % 4,646 0.59 % 5,284 0.77 % Commercial construction 3,607 0.87 % — — % 1,800 1.25 % 10,542 — — — % Residential mortgage 2,658 0.42 % 1,785 0.36 % 2,494 0.51 % 3,661 0.86 % 2,403 0.67 % Home equity 2,888 0.61 % 2,201 0.53 % 3,127 0.75 % 3,197 0.74 % 2,890 0.70 % Installment and other consumer 352 0.48 % 425 0.65 % 426 0.63 % 501 0.68 % 452 0.67 % Consumer construction — — % — — % — — % — — % — — % Loans held for sale 143 — % — — % — — % — — % — — % Total Loans $ 24,626 0.49% $ 8,662 0.22% $ 12,140 0.75% $ 25,190 0.64% $ 20,134 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 of 30 to 89 days past due for early identification of potential problem loans. Loans past due 90 days or more increased $22.9 million compared to December 31, 2014 and represented 0.70 percent of total loans at December 31, 2015. Loans past due by 30 to 89 days increased $16.0 million and represent 0.49 percent of total loans at December 31, 2015. The increase in our delinquency categories is mainly due to the Merger which accounted for
42 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued approximately $16.2 million of the total increase in loans past due 90 days or more and $14.2 million of the total increase in loans past due by 30 to 89 days. Delinquency increased in all loan categories in 2015, with the exception of installment and other consumer.
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 and may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: evaluation and impairment tests of individual loans and impairment tests of certain groups of homogeneous loans with similar risk characteristics. Our charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan. We may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to: • The status of a bankruptcy proceeding • The value of collateral and probability of successful liquidation; and/or • The status of adverse proceedings or litigation that may result in collection
Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell. The following summarizes our loan charge-off experience for each of the five years presented below:
Years Ended December 31, (dollars in thousands) 2015 2014 2013 2012 2011 ALL Balance at Beginning of Year: $ 47,911 $ 46,255 $ 46,484 $ 48,841 $ 51,387 Charge-offs:
Commercial real estate (2,787) (2,041) (4,601) (9,627) (8,824) 10-K Form Commercial and industrial (5,463) (1,267) (2,714) (5,278) (8,971) Commercial construction (3,321) (712) (4,852) (10,521) (1,720) Consumer real estate (2,167) (1,200) (2,407) (2,509) (2,617) Other consumer (1,528) (1,133) (1,002) (1,078) (1,013) Total (15,266) (6,353) (15,576) (29,013) (23,145) Recoveries: Commercial real estate 3,545 1,798 3,388 1,259 780 Commercial and industrial 605 3,647 2,142 1,153 357 Commercial construction 143 146 531 891 2,463 Consumer real estate 495 350 651 197 1,030 Other consumer 326 353 324 341 360 Total 5,114 6,294 7,036 3,841 4,990 Net Charge-offs (10,152) (59) (8,540) (25,172) (18,155) Provision for loan losses 10,388 1,715 8,311 22,815 15,609 ALL Balance at End of Year: $ 48,147 $ 47,911 $ 46,255 $ 46,484 $ 48,841
Net loan charge-offs increased from $0.1 million to $10.1 million, or 0.22 percent of average loans, for 2015 compared to 0.00 percent of average loans for 2014. Net loan charge-offs were at historic low levels in 2014. The Merger accounted for approximately $6.0 million of loan charge-offs during 2015, which primarily related to four relationships that experienced credit deterioration subsequent to the acquisition date. Net charge-offs increased significantly in C&I, related to two originated loans, and in commercial construction due to the aforementioned acquired loans in comparison to 2014.
43 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued The following table summarizes net charge-offs as a percentage of average loans and other ratios as of December 31:
2015 2014 2013 2012 2011 Commercial real estate (0.04)% 0.01 % 0.08% 0.59% 0.55 % Commercial and industrial 0.40 % (0.26)% 0.07% 0.57% 1.24 % Commercial construction 0.96 % 0.32 % 2.72% 5.94% (0.34)% Consumer real estate 0.17 % 0.09 % 0.20% 0.28% 0.20 % Other consumer 1.37 % 1.19 % 0.99% 0.91% 0.94 % Net charge-offs to average loans outstanding 0.22 % — % 0.25% 0.78% 0.56 % Allowance for loan losses as a percentage of total loans 0.96 % 1.24 % 1.30% 1.38% 1.56 % Allowance for loan losses to total nonperforming loans 136 % 385 % 206% 85% 87 % Provision for loan losses as a percentage of net loan charge-offs 102 % NM 97% 91% 86 % NM - percentage not meaningful
An inherent risk to the loan portfolio as a whole is the condition of the economy in our markets. In addition, each loan segment carries with it risks specific to the segment. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer. 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. The following is the ALL balance by portfolio segment as of December 31:
2015 2014 2013 2012 2011 % of % of % of % of % of (dollars in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total Commercial real estate $ 15,043 31 % $ 20,164 42 % $ 18,921 41 % $ 25,246 54 % $ 29,804 61 % Commercial and industrial 10,853 23 % 13,668 28 % 14,443 31 % 7,759 17 % 11,274 23 % Commercial construction 12,625 26 % 6,093 13 % 5,374 12 % 7,500 16 % 3,703 8 % Consumer real estate 8,400 17 % 6,333 13 % 6,362 14 % 5,058 11 % 3,166 6 % Other consumer 1,226 3 % 1,653 4 % 1,165 2 % 921 2 % 894 2 % Total $ 48,147 100% $ 47,911 100% $ 46,265 100% $ 46,484 100% $ 48,841 100%
44 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Significant to our ALL is a higher concentration of commercial loans. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. 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) 2015 2014 2013 2012 2011 Collectively Evaluated for Impairment $ 48,110 $ 47,857 $ 46,158 $ 44,253 $ 43,296 Individually Evaluated for Impairment 37 54 97 2,231 5,545 Total Allowance for Loan Losses $ 48,147 $ 47,911 $ 46,255 $ 46,484 $ 48,841
The ALL was $48.1 million, or 0.96 percent of total loans, at December 31, 2015 as compared to $47.9 million, or 1.24 percent of total portfolio loans at December 31, 2014. The ALL as a percentage of originated loans was 1.10 percent at December 31, 2015. The decrease in the ALL to total portfolio loans from December 31, 2015 to December 31, 2014 is partly due to the Merger. Acquired loans of $788.7 million were recorded at fair value with no carryover of the ALL. Additional credit deterioration on acquired loans, in excess of the original credit discount embedded in the fair value determination at the date of acquisition, was recognized in the ALL through the provision for loan losses. Overall, the total ALL balance remains relatively consistent, but a higher percentage of the ALL is attributable to the commercial construction portfolio segment due to increased inherent risk in this loan portfolio. The commercial construction portfolio loan balances have increased and we have experienced an increase in the delinquency rate during 2015 in this portfolio. Impaired loans increased $4.4 million, or 10.8 percent, from December 31, 2014. As of December 31, 2015, we had $45.7 million of impaired loans which included $19.0 million of new impaired loans during 2015. The $19.0 million of new impaired loans were due to $9.9 million of acquired loans, primarily due to nine relationships that experienced credit deterioration since the acquisition date, and $9.1 million of originated loans. The reserve for loans collectively evaluated for impairment did not change significantly at December 31, 2015 compared to December 31, 2014. While we experienced an increase our asset quality metrics, the changes have primarily been related to the acquired loan portfolio which was accounted for at fair value at the date of acquisition. Further deterioration in acquired loans was accounted for through additional provision during 2015 and considered in the total ALL at December 31, 2015.
Federal Home Loan Bank and Other Restricted Stock 10-K Form At December 31, 2015 and 2014, we held FHLB of Pittsburgh stock of $22.2 million and $14.3 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, 2015. The FHLB reported improved earnings throughout 2015 and 2014 and continues to exceed all capital ratios required. Additionally, we considered that the FHLB has been paying dividends and redeeming excess stock throughout 2015 and 2014. Accordingly, we believe sufficient evidence exists to conclude that no OTTI exists at December 31, 2015. At December 31, 2015 and 2014, we held Atlantic Community Bankers’ Bank, or ACBB, stock of $0.9 million and $0.8 million. 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, 2015, the book value of our ACBB stock was $2,047 per share; therefore, management believes that no OTTI exists at December 31, 2015.
45 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Deposits The following table presents the composition of deposits at December 31:
(dollars in thousands) 2015 2014 $ Change Noninterest-bearing demand $ 1,227,766 $ 1,083,919 $ 143,847 Interest-bearing demand 586,936 333,015 253,921 Money market 384,725 309,245 75,480 Savings 1,061,265 1,027,095 34,170 Certificates of deposit 1,197,030 933,210 263,820 Brokered deposits 418,889 222,358 196,531 Total $ 4,876,611 $ 3,908,842 $ 967,769
Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new deposits. Total deposits at December 31, 2015 increased $967.8 million, or 24.8 percent, primarily due to $722.3 million of deposits added from the Merger. Of the $722.3 million added from the Merger, $228.2 million was noninterest-bearing demand, $151.6 million was interest-bearing demand, $87.3 million was money market, $24.8 million was savings and $230.4 million was CDs including brokered deposits. Overall, our customer deposits increased $771.2 million from December 31, 2014. Customer deposit growth included a $143.8 million, or 13.3 percent, increase in noninterest-bearing demand, a $253.9 million, or 76.2 percent, increase in interest-bearing demand, a $75.5 million, or 24.4 percent, increase in money market, a $34.2 million, or 3.3 percent, increase in savings and $263.8 million, or 28.3 percent increase in CDs. Our brokered deposits increased $196.5 million, or 88.4 percent, compared to December 31, 2014. Brokered deposits consist of CDs, money market, and interest-bearing demand funds and are an additional source of funds utilized by the ALCO as a way to diversify funding sources, as well as manage our funding costs and structure. The increase in brokered deposits was primarily due to funding needs to support our asset growth. The daily average balance of deposits and rates paid on deposits are summarized for the years ended December 31 in the following table:
2015 2014 2013 (dollars in thousands) Amount Rate Amount Rate Amount Rate Noninterest-bearing demand $ 1,170,011 $ 1,046,606 $ 955,475 Interest-bearing demand 592,301 0.13 % 321,907 0.02 % 309,748 0.02 % Money market 388,172 0.19 % 321,294 0.16 % 319,831 0.14 % Savings 1,072,683 0.16 % 1,033,482 0.16 % 1,001,209 0.17 % Certificates of deposit 1,093,564 0.77 % 905,346 0.79 % 973,339 0.92 % Brokered deposits 376,095 0.35 % 226,169 0.34 % 81,112 0.29 % Total $ 4,692,826 0.28% $ 3,854,804 0.26% $ 3,640,714 0.31%
CDs of $100,000 and over, including Certificate of Deposit Account Registry Services CDs, or CDARS, accounted for 11.8 percent of total deposits at December 31, 2015 and 9.8 percent at December 31, 2014, and primarily represent deposit relationships with local customers in our market area. Maturities of certificates of deposit of $100,000 or more outstanding at December 31, 2015, including brokered deposits, are summarized as follows:
(dollars in thousands) 2015
Three months or less $ 169,603 Over three through six months 98,569 Over six through twelve months 102,557 Over twelve months 184,709 Total $ 555,438
46 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Borrowings The following table represents the composition of borrowings for the years ended December 31:
(dollars in thousands) 2015 2014 $ Change Securities sold under repurchase agreements, retail $ 62,086 $ 30,605 $ 31,481 Short-term borrowings 356,000 290,000 66,000 Long-term borrowings 117,043 19,442 97,601 Junior subordinated debt securities 45,619 45,619 — Total Borrowings $ 580,748 $ 385,666 $ 195,082
Borrowings are an additional source of funding for us. We define repurchase agreements 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. Short-term borrowings are for terms under one year and were comprised primarily of FHLB advances. Long-term borrowings are for terms greater than one year and consist primarily of FHLB advances. FHLB borrowings are for various terms secured by a blanket lien on eligible real estate secured loans. These borrowings were utilized to support strong asset growth during 2015. Information pertaining to short-term borrowings is summarized in the tables below:
Securities Sold Under Repurchase Agreements (dollars in thousands) 2015 2014 2013 Balance at December 31 $ 62,086 $ 30,605 $ 33,847 Average balance during the year 44,394 28,372 54,057 Average interest rate during the year 0.01% 0.01% 0.12% Maximum month-end balance during the year $ 62,086 $ 40,983 $ 83,766 Average interest rate at December 31 0.01% 0.01% 0.01%
Short-Term Borrowings (dollars in thousands) 2015 2014 2013 Balance at December 31 $ 356,000 $ 290,000 $ 140,000 Average balance during the year 257,117 164,811 101,973 om10-K Form Average interest rate during the year 0.36% 0.31% 0.27% Maximum month-end balance during the year $ 356,000 $ 290,000 $ 175,000 Average interest rate at December 31 0.52% 0.30% 0.30%
Information pertaining to long-term borrowings is summarized in the tables below:
Long-Term Borrowings (dollars in thousands) 2015 2014 2013 Balance at December 31 $ 117,043 $ 19,442 $ 21,810 Average balance during the year 83,648 20,571 24,312 Average interest rate during the year 0.94% 3.00% 3.07% Maximum month-end balance during the year $ 118,432 $ 21,616 $ 28,913 Average interest rate at December 31 0.81% 2.97% 3.01%
Junior Subordinated Debt Securities (dollars in thousands) 2015 2014 2013 Balance at December 31 $ 45,619 $ 45,619 $ 45,619 Average balance during the year 47,071 45,619 65,989 Average interest rate during the year 2.82% 2.68% 3.14% Maximum month-end balance during the year $ 45,619 $ 45,619 $ 90,619 Average interest rate at December 31 2.89% 2.70% 2.70%
47 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued At December 31, 2015, long-term borrowings increased $97.6 million as compared to December 31, 2014 as a result of shifting $100 million of short-term borrowings to a long-term variable rate borrowing in the second quarter of 2015. At December 31, 2015, our long-term borrowings outstanding of $117.0 million included $13.9 million that were at a fixed rate and $103.1 million 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. The subordinated debt converted to a variable rate of three-month LIBOR plus 160 basis 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 and had an interest rate initially at a rate of 6.44 percent per annum and adjusts quarterly 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 interest we pay on the junior subordinate debt held by the Trust. Because the third-party investors are the primary beneficiaries, the Trust qualifies as a variable interest entity, but is not consolidated in our financial statements. On March 4, 2015 we assumed a $13.5 million junior subordinated debt from the Integrity acquisition. On March 5, 2015, we paid off $8.5 million and on June 18, 2015, we paid off the remaining $5.0 million.
Wealth Management Assets
As of December 31, 2015, the fair value of the S&T Bank Wealth Management assets under management, or AUM, and administration, which are not accounted for as part of our assets, increased to $2.1 billion from $2.0 billion as of December 31, 2014. AUM consist of $1.1 billion in S&T Trust, $0.5 billion in S&T Financial Services and $0.5 billion in Stewart Capital Advisors. The increase in 2015 is primarily attributable to 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 Report contains or references, certain non-GAAP financial measures, such as net interest income on a FTE 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 other 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 FTE 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 FTE basis on pages 26 and 32. Operating revenue is the sum of net interest income plus noninterest income, excluding security gains/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 FTE 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 page 19. Total shareholders equity and total average shareholders equity are also reconciled to total tangible common equity and total tangible average common equity on page 19. These measures are consistent with industry practice.
48 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued Capital Resources Shareholders’ equity increased $183.8 million, or 30.2 percent, to $792.2 million at December 31, 2015 compared to $608.4 million at December 31, 2014. The increase in shareholders’ equity is primarily due to $142.5 million of common stock issued in the Merger and net income exceeding dividends by $42.6 million for 2015. Included in other comprehensive income (loss) was a decrease of $2.6 million due to the adjustment in the funded status of the employee benefit plans due to asset performance and by the change in unrealized gains on securities available-for-sale, due to the decline in interest rates at the end of the year. We continue to maintain a strong capital position with a leverage ratio of 8.96 percent as compared to the regulatory guideline of 5.00 percent to be well capitalized and a Common Equity Tier 1 ratio of 9.77 percent compared to the regulatory guideline of 6.50 percent to be well capitalized. Our risk-based Tier 1 and Total capital ratios were 10.15 percent and 11.60 percent at December 31, 2015, which places us significantly above the federal bank regulatory agencies’ “well capitalized” guidelines of 8.00 percent and 10.00 percent for Tier 1 and Total capital. We believe that we have the ability to raise additional capital, if necessary. In July 2013 the federal banking agencies issued a final rule to implement Basel III (which were agreements reached in July 2010 by the international oversight body of the Basel Committee on Banking Supervision to require 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 of 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 for 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 of total risk-weighted assets beginning in 2019. The capital conservation buffer will be phased in beginning in 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 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. 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 10-K Form 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 regulatory capital rules 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. In October 2015, we filed a new shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, with the SEC, to replace the prior shelf registration statement we had filed in October 2012. The new shelf registration statement allows for the issuance of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to, our subsidiaries, possible acquisitions and stock repurchases. As of December 31, 2015, we had not issued any securities pursuant to the shelf registration statement.
49 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, 2015, significant fixed and determinable contractual obligations to third parties by payment date:
Payments Due In (dollars in thousands) 2016 2017-2018 2019-2020 Later Years Total Deposits without a stated maturity(1) $ 3,510,403 $ — $ — $ — $ 3,510,403 Certificates of deposit(1) 870,679 407,706 79,550 8,273 1,366,208 Securities sold under repurchase agreements(1) 62,086———62,086 Short-term borrowings(1) 356,000———356,000 Long-term borrowings(1) 102,330 4,908 4,518 5,287 117,043 Junior subordinated debt securities(1) — — — 45,619 45,619 Operating and capital leases 2,936 5,946 5,924 53,717 68,523 Purchase obligations 11,360 23,866 25,478 — 60,704 Total $ 4,915,794 $ 442,426 $ 115,470 $ 112,896 $ 5,586,586 (1) Excludes interest Operating lease obligations represent short and long-term lease arrangements as described in Part II, Item 8, Note 10 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 18 Commitments and 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. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The following table sets forth the commitments and letters of credit as of December 31:
(dollars in thousands) 2015 2014 Commitments to extend credit $ 1,619,854 $ 1,158,628 Standby letters of credit 97,676 73,584 Total $ 1,717,530 $ 1,232,212
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 increased $0.2 million to $2.5 million at December 31, 2015 compared to $2.3 million at December 31, 2014.
50 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. In order to manage liquidity risk our Board of Directors has delegated authority to the ALCO for formulation, implementation and oversight of liquidity risk management for S&T. ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and by having a detailed contingency funding plan. ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position. Our primary funding and liquidity source is a stable customer deposit base. We believe S&T Bank has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile sources. Refer to the Deposits Section of this Part 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 efficiency has been identified. Additional funding sources accessible to S&T include borrowing availability at the FHLB of Pittsburgh, Federal Funds lines with other financial institutions, the brokered deposit market, and borrowing availability through the Federal Reserve Borrower-In-Custody program. An important component of S&T’s ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At December 31, 2015 S&T Bank had $442.8 million in highly liquid assets, which consisted of $41.2 million in interest-bearing deposits with banks, $366.2 million in unpledged securities and $35.3 million in loans held for sale. The highly liquid assets to total assets resulted in an asset liquidity ratio of 7.0 percent at December 31, 2015. Also, at December 31, 2015, we had borrowing availability of $1.4 billion with the FHLB of Pittsburgh. Refer to Part II, Item 8, Notes 16 and 17 Short-term and Long-term borrowings, and the Borrowings section of this Part II, Item 7, MD&A, for more details.
Inflation
Management is aware of the significant effect inflation has on interest rates and can have on financial performance. Our 10-K Form 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.
51 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 the ALCO. ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analysis and by performing stress tests in order to mitigate earnings and market value fluctuations due to changes in interest rates. Rate shock analyses results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 months of pretax net interest income. The base case and rate shock analyses are performed on a static balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest- bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of loans and securities with optionality. S&T policy guidelines limit the change in pretax net interest income over a 12 month horizon using rate shocks of +/- 300 basis points. Policy guidelines define the percent change in pretax net interest income by graduated risk tolerance levels of minimal, moderate and high. We have temporarily suspended the -200 and -300 basis point rate shock analyses. Due to the low interest rate environment, we believe the impact to net interest income when evaluating the -200 and -300 basis point rate shock scenarios does not provide meaningful insight into our interest rate risk position. In order to monitor interest rate risk beyond the 12 month time horizon of rate shocks, we also perform EVE analysis. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE rate change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analysis, EVE incorporates management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit products. S&T policy guidelines limit the change in EVE given changes in rates of +/- 300 basis points. Policy guidelines define the percent change in EVE by graduated risk tolerance levels of minimal, moderate and high. We have also temporarily suspended the EVE -200 and -300 basis point scenarios due to the low interest rate environment. The table below reflects the rate shock analyses and EVE results. Both are in the minimal risk tolerance level.
December 31, 2015 December 31, 2014 % Change in % Change in Change in Interest % Change in Pretax Economic Value of % Change in Pretax Economic Value of Rate (basis points) Net Interest Income Equity Net Interest Income Equity 300 5.5 (0.8) 6.7 1.8 200 3.3 1.7 4.1 3.9 100 1.6 2.3 1.8 3.5 (100) (5.1) (11.1) (3.4) (12.3)
The results from the rate shock analyses are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive balance sheet will differ depending upon the change in market interest rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in net interest income and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in net interest income and operating income. As measured by rate shock analyses, an increase in interest rates would have a positive impact on pretax net interest income. Our rate shock analyses indicate that there was a decline in the percent change in pretax net interest income for our rates up and rates down shock scenarios when comparing December 31, 2015 and December 31, 2014. The decline in the rates up shock scenarios is mainly a result of becoming slightly less asset sensitive due to utilization of short-term funding to support asset growth during the fourth quarter of 2015. The decline in the rates down shock scenario is mainly a result of higher rates on assets in the base case when compared to December 31, 2014. Higher base case asset portfolio rates resulted in a larger decrease in rates before hitting assumed floors.
52 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued
When comparing the EVE results for December 31, 2015 and December 31, 2014, the percent change to EVE has decreased in the rates up shock scenarios and improved in the rate down shock scenario. The percent change to EVE in our rate shock scenarios is mainly attributed to the change in value of our core deposits due to a lower rate environment. 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 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. 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 54 Consolidated Statements of Net Income 55 Consolidated Statements of Comprehensive Income 56 Consolidated Statements of Changes in Shareholders’ Equity 57 Consolidated Statements of Cash Flows 58 Notes to Consolidated Financial Statements 60 Report of KPMG LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting 112 Report of KPMG LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements 113 om10-K Form
53 CONSOLIDATED BALANCE SHEETS S&T Bancorp, Inc. and Subsidiaries
December 31, (in thousands, except share and per share data) 2015 2014 ASSETS Cash and due from banks, including interest-bearing deposits of $41,639 and $57,048 at December 31, 2015 and 2014 $ 99,399 $ 109,580 Securities available-for-sale, at fair value 660,963 640,273 Loans held for sale 35,321 2,970 Portfolio loans, net of unearned income 5,027,612 3,868,746 Allowance for loan losses (48,147) (47,911) Portfolio loans, net 4,979,465 3,820,835 Bank owned life insurance 70,175 62,252 Premises and equipment, net 49,127 38,166 Federal Home Loan Bank and other restricted stock, at cost 23,032 15,135 Goodwill 291,764 175,820 Other intangible assets, net 6,525 2,631 Other assets 102,583 97,024 Total Assets $ 6,318,354 $ 4,964,686 LIABILITIES Deposits: Noninterest-bearing demand $ 1,227,766 $ 1,083,919 Interest-bearing demand 616,188 335,099 Money market 605,184 376,612 Savings 1,061,265 1,027,095 Certificates of deposit 1,366,208 1,086,117 Total Deposits 4,876,611 3,908,842 Securities sold under repurchase agreements 62,086 30,605 Short-term borrowings 356,000 290,000 Long-term borrowings 117,043 19,442 Junior subordinated debt securities 45,619 45,619 Other liabilities 68,758 61,789 Total Liabilities 5,526,117 4,356,297 SHAREHOLDERS’ EQUITY Common stock ($2.50 par value) Authorized—50,000,000 shares Issued—36,130,480 shares at December 31, 2015 and 31,197,365 shares at December 31, 2014 Outstanding—34,810,374 shares at December 31, 2015 and 29,796,397 shares at December 31, 2014 90,326 77,993 Additional paid-in capital 210,545 78,818 Retained earnings 544,228 504,060 Accumulated other comprehensive income (loss) (16,457) (13,833) Treasury stock (1,320,106 shares at December 31, 2015 and 1,400,968 shares at December 31, 2014, at cost) (36,405) (38,649) Total Shareholders’ Equity 792,237 608,389 Total Liabilities and Shareholders’ Equity $ 6,318,354 $ 4,964,686 See Notes to Consolidated Financial Statements
54 CONSOLIDATED STATEMENTS OF NET INCOME S&T Bancorp, Inc. and Subsidiaries
Years ended December 31, (dollars in thousands, except per share data) 2015 2014 2013 INTEREST INCOME Loans, including fees $ 188,012 $ 147,293 $ 142,492 Investment Securities: Taxable 9,792 8,983 7,478 Tax-exempt 3,954 3,857 3,401 Dividends 1,790 390 385 Total Interest Income 203,548 160,523 153,756 INTEREST EXPENSE Deposits 12,944 10,128 11,406 Borrowings and junior subordinated debt securities 3,053 2,353 3,157 Total Interest Expense 15,997 12,481 14,563 NET INTEREST INCOME 187,551 148,042 139,193 Provision for loan losses 10,388 1,715 8,311 Net Interest Income After Provision for Loan Losses 177,163 146,327 130,882 NONINTEREST INCOME Securities (losses) gains, net (34) 41 5 Debit and credit card fees 12,113 10,781 10,931 Service charges on deposit accounts 11,642 10,559 10,488 Wealth management fees 11,444 11,343 10,696 Insurance fees 5,500 5,955 6,248 Gain on sale of merchant card servicing business — — 3,093 Mortgage banking 2,554 917 2,123 Other 7,814 6,742 7,943 Total Noninterest Income 51,033 46,338 51,527 NONINTEREST EXPENSE
Salaries and employee benefits 68,252 60,442 60,847 10-K Form Net occupancy 10,652 8,211 8,018 Data processing 9,677 8,737 8,263 Furniture and equipment 6,093 5,317 4,883 Marketing 4,224 3,316 2,929 Other taxes 3,616 2,905 3,743 FDIC insurance 3,416 2,436 2,772 Professional services and legal 3,365 3,717 4,184 Merger related expenses 3,167 689 838 Other 24,255 21,470 20,915 Total Noninterest Expense 136,717 117,240 117,392 Income Before Taxes 91,479 75,425 65,017 Provision for income taxes 24,398 17,515 14,478 Net Income Available to Common Shareholders $ 67,081 $ 57,910 $ 50,539 Earnings per common share—basic $ 1.98 $ 1.95 $ 1.70 Earnings per common share—diluted $ 1.98 $ 1.95 $ 1.70 Dividends declared per common share $ 0.73 $ 0.68 $ 0.61 See Notes to Consolidated Financial Statements
55 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME S&T Bancorp, Inc. and Subsidiaries
Years ended December 31, (dollars in thousands) 2015 2014 2013 Net Income $ 67,081 $ 57,910 $ 50,539 Other Comprehensive Income (Loss), Before Tax: Net change in unrealized (losses) gains on securities available-for-sale (663) 11,825 (16,928) Net available-for-sale securities losses (gains) reclassified into earnings 34 (41) (5) Adjustment to funded status of employee benefit plans (3,551) (13,394) 18,299 Other Comprehensive Income (Loss), Before Tax (4,180) (1,610) 1,366 Income tax benefit (expense) related to items of other comprehensive income 1,556 471 (478) Other Comprehensive Income (Loss), After Tax (2,624) (1,139) 888 Comprehensive Income $ 64,457 $ 56,771 $ 51,427 See Notes to Consolidated Financial Statements
56 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY S&T Bancorp, Inc. and Subsidiaries
Accumulated Additional Other (in thousands, except share Common Paid-in Retained Comprehensive Treasury and per share data) Stock Capital Earnings Income (Loss) Stock Total 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 expense 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 Net income for 2015 67,081 67,081 Other comprehensive income (loss), net of tax (2,624) (2,624) Cash dividends declared ($0.73 per share) (24,487) (24,487) Common stock issued in acquisition (4,933,115 shares) 12,333 130,136 142,469 Treasury stock issued (80,862 shares, net) (2,426) 2,244 (182) Recognition of restricted stock compensation expense 1,670 1,670 Tax benefit from stock-based compensation 53 — 53 Issuance costs (132) (132)
Balance at December 31, 2015 $ 90,326 $ 210,545 $ 544,228 $ (16,457) $ (36,405) $ 792,237 10-K Form See Notes to Consolidated Financial Statements
57 CONSOLIDATED STATEMENTS OF CASH FLOWS S&T Bancorp, Inc. and Subsidiaries
Years ended December 31, (dollars in thousands) 2015 2014 2013 OPERATING ACTIVITIES Net Income $ 67,081 $ 57,910 $ 50,539 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 10,388 1,715 8,311 Provision for unfunded loan commitments 258 (655) (60) Net depreciation, amortization and accretion 356 4,703 5,333 Net amortization of discounts and premiums on securities 3,600 3,680 3,826 Stock-based compensation expense 1,636 975 687 Securities losses, (gains), net 34 (41) (5) Net gain on sale of merchant card servicing business — — (3,093) Tax benefit from stock-based compensation (53) (16) (96) Mortgage loans originated for sale (107,489) (42,842) (66,695) Proceeds from the sale of loans 99,458 42,361 87,932 Deferred income taxes (427) 1,536 (2,358) Gain on sale of fixed assets (179) (33) — Gain on the sale of loans, net (1,044) (353) (874) Net increase in interest receivable (2,744) (933) (130) Net decrease in interest payable (193) (127) (2,005) Net (increase) decrease in other assets (11,396) 7,628 25,681 Net increase (decrease) in other liabilities 1,298 2,595 (20,917) Net Cash Provided by Operating Activities 60,584 78,103 86,076 INVESTING ACTIVITIES Proceeds from maturities, prepayments and calls of securities available-for-sale 50,142 57,092 66,744 Proceeds from sales of securities available-for-sale 11,119 1,418 94 Purchases of securities available-for-sale (74,712) (181,213) (144,752) Net purchases of Federal Home Loan Bank stock (855) (1,506) 1,685 Net increase in loans (383,575) (313,264) (241,172) Proceeds from the sale of loans not originated for resale 2,880 5,408 5,158 Purchases of premises and equipment (5,133) (5,079) (2,833) Proceeds from the sale of premises and equipment 467 96 643 Net cash paid in excess of cash acquired from bank merger (16,347) — — Proceeds from the sale of merchant card servicing business — — 4,750 Proceeds from surrender of bank owned life insurance 10,277 — — Net Cash Used in Investing Activities (405,737) (437,048) (309,683) FINANCING ACTIVITIES Net increase (decrease) in core deposits 195,589 240,948 (22,767) Net increase (decrease) in certificates of deposit 51,209 (4,549) 56,174 Net (decrease) increase in short-term borrowings (2,660) 150,000 65,000 Net increase (decrease) in securities sold under repurchase agreements 31,481 (3,242) (28,735) Proceeds from long-term borrowings 100,000 — — Repayments of long-term borrowings (2,399) (2,367) (12,291) Repayment of junior subordinated debt (13,500) — (45,000) Treasury shares issued-net (182) (163) (88) Common stock Issuance costs (132) (271) — Cash dividends paid to common shareholders (24,487) (20,203) (18,137) Tax benefit from stock-based compensation 53 16 96 Net Cash Provided by (Used in) Financing Activities 334,972 360,169 (5,748) Net (decrease) increase in cash and cash equivalents (10,181) 1,224 (229,355) Cash and cash equivalents at beginning of year 109,580 108,356 337,711 Cash and Cash Equivalents at End of Year $ 99,399 $ 109,580 $ 108,356
58 Years ended December 31, (dollars in thousands) 2015 2014 2013 Supplemental Disclosures Transfers to other real estate owned and other repossessed assets $ 843 $ 586 $ 1,238 Interest paid 15,878 12,609 16,568 Income taxes paid, net of refunds 23,175 18,075 13,130 Loans transferred to held for sale 23,277 — 5,158 Net assets (liabilities) from acquisitions, excluding cash and cash equivalents 43,433 — — See Notes to Consolidated Financial Statements om10-K Form
59 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 50 percent interest in Commonwealth Trust Credit Life Insurance Company, or CTCLIC. We are presently engaged in nonbanking activities through the following five entities: 9th Street Holdings, Inc.; S&T Bancholdings, Inc.; CTCLIC; S&T Insurance 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. 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 October 29, 2014, S&T and Integrity Bancshares, Inc., or Integrity, based in Camp Hill, Pennsylvania, entered into an agreement to acquire Integrity Bancshares, Inc. and the transaction was completed on March 4, 2015. Integrity Bank was subsequently merged into S&T Bank on May 8, 2015. S&T Bank is operating under the name "Integrity Bank - A Division of S&T Bank" in south-central Pennsylvania.
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.
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 results of 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 expensed when incurred. The difference between the purchase price and the fair value of the net assets acquired (including identified intangibles) is recorded as goodwill.
Fair Value Measurements
We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available- for-sale, trading assets and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans, other real estate owned, or OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of
60 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed, based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets. Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data. Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.
Recurring Basis Securities Available-for-Sale
Securities available-for-sale include both debt and equity securities. We obtain fair values for debt securities from a third- party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing service which provides us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, and vast descriptive terms and conditions databases, as well as extensive quality control programs. Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded 10-K Form and do not have a quotable market are classified as Level 3.
Trading Assets
We use quoted market prices to determine the fair value of our trading assets. Our trading assets are held in a Rabbi Trust under a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1.
Derivative Financial Instruments
We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. We calculate the fair value for derivatives using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2. We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparties’ nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings.
61 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Nonrecurring Basis Loans Held for Sale
Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3.
Impaired Loans
Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. We establish specific reserves based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate, 2) the loan’s observable market price or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3.
OREO and Other Repossessed Assets
OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value are classified as Level 3.
Mortgage Servicing Rights
The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. The valuation model includes significant unobservable inputs; therefore, MSRs are classified as Level 3.
Other Assets
We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.
Financial Instruments
In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.
62 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.
Loans
The fair value of variable rate performing loans that may reprice frequently at short-term market rates is based on carrying values adjusted for credit risk. The fair value of variable rate performing loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of fixed rate performing loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans and adjusted for credit risk. The fair value of impaired 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 of bank owned life insurance, or BOLI.
Federal Home Loan Bank, or FHLB, and Other Restricted Stock
It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value.
Deposits
The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.
Short-Term Borrowings
The carrying amounts of securities sold under repurchase agreements, or REPOs, and other short-term borrowings 10-K Form approximate their fair values.
Long-Term Borrowings
The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.
Junior Subordinated Debt Securities
The variable rate junior subordinated debt securities reprice quarterly; therefore, the carrying values approximate their fair values.
Loan Commitments and Standby Letters of Credit
Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
Other
Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations.
63 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
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.
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 of any decline in its estimated fair value. If the impairment is considered other-than-temporary based on management’s review, the impairment must be separated into credit and non-credit components. 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.
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 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. Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related ALL. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. In estimating the fair value of our acquired loans, we consider a number of factors including the loan term, internal risk rating, delinquency status, prepayment rates, recovery periods, estimated value of the underlying collateral and the current interest rate environment. 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.
64 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
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.
Nonaccrual or Nonperforming Loans
We stop accruing interest on a 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 contractual 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. As 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.
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 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 10-K Form satisfactory payment performance by the borrower either immediately before or after the 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. TDRs will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is 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 because most of our 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. 65 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
We first apply historical loss rates to pools of loans with similar risk characteristics. Loss rates are calculated by historical charge-offs that have occurred within each pool of loans over the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from when an event happens that causes the borrower to be unable to pay on a loan until the loss is confirmed through a loan charge-off. In conjunction with our annual review of the ALL assumptions, we have updated our analysis of LEPs for our Commercial and Consumer loan portfolio segments using our loan charge-off history. The analysis showed that the LEP for our C&I, has shortened and our CRE, and Commercial Construction portfolio segments have not changed. We estimate the LEP to be 2 years for C&I, compared to 2.5 years in the prior year, and 3.5 years for both CRE and Commercial Construction. Our analysis showed an LEP for Consumer Real Estate of 3.5 years and Other Consumer of 1.25 years. This compares to 2 years for both Consumer Real Estate and Other Consumer in the prior year when peer data was being utilized to estimate the LEP. We believe that our actual experience captured through our internal analysis better reflects the inherent risk in these portfolios compared to the peer data used in prior years. 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 all Commercial and Consumer portfolio segments in order to capture relevant historical data believed to be reflective of losses inherent in the portfolios. We use 6.5 years for our LBP for all portfolio segments which encompasses our loss experience during the Great Recession and our more recent improved loss experience. 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. The following qualitative factors are considered in the ALL: 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 nonaccrual 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.
The changes made to the ALL assumptions were applied prospectively and did not result in a material change to the total ALL. Lengthening the LBP 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. Loans acquired with evidence of credit deterioration were evaluated and not considered to be significant. The premium or discount estimated through the loan fair value calculation is recognized into interest income on a level yield or straight-line basis over the remaining contractual life of the loans. Additional credit deterioration on acquired loans, in excess of the original credit discount embedded in the fair value determination on the date of acquisition, will be recognized in the ALL through the provision for loan losses. 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 methodology. This validation includes reviewing the loan segmentation, LEP, LBP and the qualitative framework. As a result of this ongoing monitoring process, we may make changes to our ALL 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.
66 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
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 by the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the particular assets. Management reviews long-lived assets using events and circumstances to determine if and when an asset is evaluated for recoverability. The estimated useful lives for the various asset categories are as follows: 1) Land and Land Improvements Non-depreciating assets 2) Buildings 25 years 3) Furniture and Fixtures 5 years 4) Computer Equipment and Software 5 years or term of license 5) Other Equipment 5 years 6) Vehicles 5 years 7) Leasehold Improvements Lesser 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 10-K Form 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, 2015, we had goodwill of $291.8 million, including $287.6 million in Community Banking, representing 99 percent of total goodwill, and $4.2 million in Insurance, representing one 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, consisting primarily of core deposit and customer list intangibles, are amortized using straight-line or accelerated methods over their estimated weighted average useful lives, ranging from 10 to 20 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. 67 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
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 right to receive benefits of the VIE, the entity has a controlling financial interest in the VIE. A VIE often holds financial assets, including 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 or acceptance of a deed in lieu 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 any 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 upon disposition of these assets are recorded in other expenses in the Consolidated Statements of Net Income.
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 is 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. 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.
68 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
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. 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 rate. These agreements could have floors or caps on the contracted interest rates. Pursuant to our agreements with various financial institutions, we may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon our current positions and related future collateral requirements relating to them, we believe any effect on our cash flow or liquidity position to be immaterial. Derivatives contain an element of credit risk, the possibility that we will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by our Asset and Liability Committee, or ALCO, and derivatives with customers may only be executed with customers within credit exposure limits approved by our Senior Loan Committee. Interest rate swaps are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Net Income.
Interest Rate Lock Commitments and Forward Sale Contracts
In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan market. We also offer interest rate lock commitments to potential borrowers. The commitments are generally for a period of 60 days and guarantee a specified interest rate for a loan if underwriting standards are met, but the commitment does not obligate the potential borrower to close on the loan. Accordingly, some commitments expire prior to becoming loans. We 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 10-K Form 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. Because 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 methodology.
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 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.
69 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
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 an accrual basis.
Stock-Based Compensation
Stock-based compensation may include stock options and restricted stock which is 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
The expense for S&T Bank’s qualified and nonqualified defined benefit pension plans 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 actively employed plan participants. The funding policy for the qualified plan is to contribute an amount each year that is at least equal to the minimum required contribution as determined under the Pension Protection Act of 2006 and the Bipartisan Budget Act of 2015, 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
70 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued 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.
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 EPS 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 EPS 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, or ASU Repurchase-To-Maturity Transactions, Repurchase Financings, and Disclosures
In June 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures which introduces two accounting changes to the Transfers and Servicing guidance (Topic 860). Repurchase-to-maturity transactions will be accounted for as secured borrowing transactions on the balance sheet and for repurchase financing arrangements, an entity will account separately for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. This will also generally result in secured borrowing accounting for the repurchase agreement. With respect to disclosures, a transferor is required to disclose information about transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the transferee. Additionally, new disclosures are required for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as
secured borrowings. The new disclosure for transactions accounted for as secured borrowings was required for interim periods 10-K Form beginning after March 15, 2015. These new disclosures are included in Note 16. Borrowings. The adoption of this ASU had no 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 earnings per share from continuing operations. An entity is required to reclassify assets and liabilities of a discontinued operation that are classified as held for sale or disposed of in the current period for all comparative periods presented. The ASU requires that an entity present in the statement of cash flows or disclose in a note either total operating and investing cash flows for discontinued operations, or depreciation, amortization, capital expenditures and significant operating and investing noncash items related to discontinued operations. Additional disclosures are required when an entity retains significant continuing involvement with a discontinued operation after its disposal, including the amount of cash flows to and from a discontinued operation. The new standard applies prospectively after the effective date of December 15, 2014, and early adoption was permitted. The adoption of this ASU had no impact on our results of operations or financial position.
71 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure has occurred and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure. Interim and annual disclosure is required of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The new standard was effective using either the modified retrospective transition method or a prospective transition method for fiscal years and interim periods within those years, beginning after December 15, 2014, and early adoption was permitted. The adoption of this ASU had no impact on our results of operations or financial position.
Accounting for Investments in Qualified Affordable Housing Projects
In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The ASU permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The proportional amortization method permits the amortization of the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The new standard was effective retrospectively for fiscal years and interim periods within those years, beginning after December 15, 2014, and early adoption was permitted. This ASU did not have a material impact on our results of operations or financial position. We did not adopt the proportional amortization method. Refer to Note 14 for additional disclosure.
72 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Recently Issued Accounting Standards Updates not yet Adopted Accounting for Financial Instruments – Overall: Classification and Measurement
In January 2016, the FASB issued ASU No. 2016-01, Accounting for Financial Instruments – Overall: Classification and Measurement (Subtopic 825-10). Amendments within ASU No. 2016-01 that relate to non-public entities have been excluded from this presentation. The amendments in this ASU No. 2016-01 address the following: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. We anticipate that this ASU would have a significant impact on our financial statements and disclosures primarily as it relates to recognizing the fair value changes for equity securities in net income rather than an adjustment to equity through other comprehensive income.
Business Combinations – Simplifying the Accounting for Measurement Period Adjustments
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations – Simplifying the Accounting for Measurement Period Adjustments (Topic 805): The amendments in this ASU No. 2015-16 eliminate the requirement to retrospectively adjust the financial statements for measurement-period adjustments as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. Additional disclosures are required about the impact on current-period income statement line items of adjustments that would have been recognized in prior periods if that information had been revised. The measurement period is a reasonable time period after the acquisition date when the acquirer may adjust the provisional amounts recognized for a business combination if the necessary information is not available by the end of the reporting period in which the acquisition occurs. The measurement periods cannot continue for more than one year from the acquisition date. The standard is effective for annual periods and interim periods beginning after December 15, 2015. We do not expect that this ASU would have a material impact on our results of operations or financial position. 10-K Form
73 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU No. 2014-09 for all entities by one year. The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are, (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when each performance obligation is satisfied. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the original effective date for interim and annual reporting periods in fiscal years beginning after December 15, 2016. We are currently evaluating the impact of the adoption of this ASU on our results of operations and financial position.
Intangibles – Goodwill and Other – Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The main provisions of ASU No. 2015-05 provide a basis for evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, then the arrangement should be accounted for as a service contract. The standard is effective for annual periods and interim periods beginning after December 15, 2015. We do not expect that this ASU would have a material impact on our results of operations or financial position.
Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2015. In September 2015, the FASB issued ASU No. 2015-15, Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU No. 2015-15 amends the Securities and Exchange Commission (SEC) Content in Subtopic 835-30 by adding SEC paragraph 835-30-S35-1, Interest--Imputation of Interest Subsequent Measurement and paragraph 830-30-S45-1, Other Presentation Matters. These paragraphs were added because ASU No. 2015-03 issued in April 2015 does not address presentation or subsequent measurement of debt issuance costs related to "line-of-credit arrangements." We do not expect that these ASU amendments would have a material impact on our results of operations or financial position.
Consolidation: Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1) modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, 2) eliminate the presumption that a general partner should consolidate a limited partnership, 3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships and 4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2A-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this ASU are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We are currently evaluating the impact that these amendments may have on our consolidated financial statements. We do not expect that this ASU would have a material impact on our results of operations or financial position.
74 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Income Statement – Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary
In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary. The amendments in this ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items and eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2015. We do not expect that this ASU would have a material impact on our results of operations or financial position. om10-K Form
75 NOTE 2. BUSINESS COMBINATIONS
On March 4, 2015, we completed the acquisition of 100 percent of the voting shares of Integrity Bancshares, Inc., or Integrity, located in Camp Hill, Pennsylvania, in a tax-free reorganization transaction structured as a merger of Integrity with and into S&T, with S&T being the surviving entity. As a result of the Integrity merger, or the Merger, Integrity Bank, the wholly owned subsidiary bank of Integrity, became a separate wholly owned subsidiary bank of S&T. The merger of Integrity Bank into S&T Bank, with S&T Bank surviving the merger, and related system conversion occurred on May 8, 2015. Integrity shareholders were entitled to elect to receive for each share of Integrity common stock either $52.50 in cash or 2.0627 shares of S&T common stock subject to allocation and proration procedures in the merger agreement. The total purchase price was approximately $172.0 million which included $29.5 million of cash and 4,933,115 S&T common shares at a fair value of $28.88 per share. The fair value of $28.88 per share of S&T common stock was based on the March 4, 2015 closing price. The Merger was accounted for under the acquisition method of accounting and our consolidated financial statements include all Integrity Bank transactions from March 4, 2015, until it was merged into S&T Bank on May 8, 2015. The assets acquired and liabilities assumed were recorded at their respective fair values and represent management’s estimates based on available information. Purchase accounting guidance allows for a reasonable period of time following an acquisition for the acquirer to obtain the information necessary to complete the accounting for a business combination. This period is known as the measurement period and shall not exceed one year from the acquisition date. As of December 31, 2015, an additional $1.1 million of purchase accounting adjustments were recognized that increased goodwill. The measurement period adjustments primarily related to a $0.8 million reduction in the fair value of land and $0.3 million to deferred taxes. Goodwill of $115.9 million was calculated as the excess of the consideration exchanged over the fair value of the identifiable net assets acquired. The goodwill arising from the Merger consists largely of the synergies and economies of scale expected from combining the operations of S&T and Integrity. All of the goodwill was assigned to our Community Banking segment. The goodwill recognized will not be deductible for tax purposes. The following table summarizes total consideration, assets acquired and liabilities assumed as of December 31, 2015:
(dollars in thousands) Consideration Paid Cash $ 29,510 Common stock 142,469 Fair Value of Total Consideration $ 171,979 Fair Value of Assets Acquired Cash and cash equivalents $ 13,163 Securities and other investments 11,502 Loans 788,687 Bank owned life insurance 15,974 Premises and equipment 10,855 Core deposit intangible 5,713 Other assets 18,994 Total Assets Acquired 864,888 Fair Value of Liabilities Assumed Deposits 722,308 Borrowings 82,286 Other liabilities 4,259 Total Liabilities Assumed 808,853 Total Fair Value of Identifiable Net Assets 56,035 Goodwill $ 115,944
Loans acquired in the Merger were recorded at fair value with no carryover of the related ALL. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The fair value of the loans acquired was $788.7 million net of a $14.8 million discount. The discount may be accreted to interest income over the remaining contractual life of the loans. Acquired loans included $331.6 million of CRE, $184.2 million of C&I, $92.4 million of commercial construction, $116.9 76 NOTE 2. BUSINESS COMBINATIONS - continued million of residential mortgage, $25.6 million of home equity, $36.1 million of installment and other consumer and $1.9 million of consumer construction. Direct costs related to the Merger were expensed as incurred. During 2015, we recognized $3.2 million of merger related expenses, including $1.3 million for data processing contract termination and system conversion costs, $1.2 million in legal and professional expenses, $0.4 million in severance payments and $0.3 million in other expenses. The following table presents unaudited pro forma financial information which combines the historical consolidated statements of income of S&T and Integrity to give effect to the Merger as if it had occurred on January 1, 2014, for the periods presented.
Unaudited Pro Forma Information (dollars in thousands, except per share data) 2015 2014 Total revenue(1) $ 240,581 $ 232,635 Net income (2) $ 68,850 $ 70,001 Earnings per common share: (2) Basic $ 1.78 $ 2.02 Diluted $ 1.77 $ 2.02 (1)Total pro forma revenue is defined as net interest income plus non-interest income, excluding gains and losses on sales of investment securities available-for-sale. (2)Excludes merger expenses
Pro forma adjustments include intangible amortization expense, net amortization or accretion of valuation amounts and income tax expense. The pro forma results are not indicative of the results of operations that would have occurred had the Merger taken place at the beginning of the periods presented nor are they intended to be indicative of results that may occur in the future.
NOTE 3. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of basic and diluted EPS:
Years ended December 31,
(dollars in thousands, except share and per share data) 2015 2014 2013 10-K Form Numerator for Earnings per Common Share—Basic: Net income $ 67,081 $ 57,910 $ 50,539 Less: Income allocated to participating shares 280 165 147 Net Income Allocated to Common Shareholders $ 66,801 $ 57,745 $ 50,392 Numerator for Earnings per Common Share—Diluted: Net income $ 67,081 $ 57,910 $ 50,539 Denominators: Weighted Average Common Shares Outstanding—Basic 33,812,990 29,683,103 29,647,231 Add: Dilutive potential common shares 35,092 25,621 35,322 Denominator for Treasury Stock Method—Diluted 33,848,082 29,708,724 29,682,553 Weighted Average Common Shares Outstanding—Basic 33,812,990 29,683,103 29,647,231 Add: Average participating shares outstanding 141,558 84,918 86,490 Denominator for Two-Class Method—Diluted 33,954,548 29,768,021 29,733,721 Earnings per common share—basic $ 1.98 $ 1.95 $ 1.70 Earnings per common share—diluted $ 1.98 $ 1.95 $ 1.70 Warrants considered anti-dilutive excluded from dilutive potential common shares - exercise price $31.53 per share, expires January 2019 517,012 517,012 517,012 Stock options considered anti-dilutive excluded from dilutive potential common shares — 419,538 619,418 Restricted stock considered anti-dilutive excluded from dilutive potential common shares 106,466 59,297 51,169
77 NOTE 4. FAIR VALUE MEASUREMENTS
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, 2015 and 2014. 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, 2015 (dollars in thousands) Level 1 Level 2 Level 3 Total ASSETS Securities available-for-sale: U.S. Treasury securities $ — $ 14,941 $ — $ 14,941 Obligations of U.S. government corporations and agencies — 263,303 — 263,303 Collateralized mortgage obligations of U.S. government corporations and agencies — 128,835 — 128,835 Residential mortgage-backed securities of U.S. government corporations and agencies — 40,125 — 40,125 Commercial mortgage-backed securities of U.S. government corporations and agencies — 69,204 — 69,204 Obligations of states and political subdivisions — 134,886 — 134,886 Marketable equity securities — 9,669 — 9,669 Total securities available-for-sale — 660,963 — 660,963 Trading securities held in a Rabbi Trust 4,021 — — 4,021 Total securities 4,021 660,963 — 664,984 Derivative financial assets: Interest rate swaps — 11,295 — 11,295 Interest rate lock commitments — 261 — 261 Total Assets $ 4,021 $ 672,519 $ — $ 676,540 LIABILITIES Derivative financial liabilities: Interest rate swaps $ — $ 11,276 $ — $ 11,276 Forward sale contracts — 5 — 5 Total Liabilities $ — $ 11,281 $ — $ 11,281
78 NOTE 4. FAIR VALUE MEASUREMENTS -- continued
December 31, 2014 (dollars in thousands) Level 1 Level 2 Level 3 Total 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 securities 178 8,881 — 9,059 Total securities available-for-sale 178 640,095 — 640,273 Trading securities held in a Rabbi Trust 3,456 — — 3,456 Total securities 3,634 640,095 — 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
We classify financial instruments as Level 3 when valuation models are used because significant inputs are not observable in the market. We may be required to measure certain assets and liabilities 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 10-K Form basis at December 31, 2015 and 2014. The following table presents our assets that are measured at fair value on a nonrecurring basis by the fair value hierarchy level as of the dates presented:
December 31, 2015 December 31, 2014 (dollars in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total ASSETS(1) Impaired loans — — 9,373 9,373 — — 12,916 12,916 Other real estate owned — — 158 158 — — 117 117 Mortgage servicing rights — — 3,396 3,396 — — 2,934 2,934 Total Assets $ — $ — $ 12,927 $ 12,927 $ — $ — $ 15,967 $ 15,967 (1) This table presents only the nonrecurring items that are recorded at fair value in our financial statements.
79 NOTE 4. FAIR VALUE MEASUREMENTS -- continued
The carrying values and fair values of our financial instruments at December 31, 2015 and 2014 are presented in the following tables:
Fair Value Measurements at December 31, 2015
Carrying (dollars in thousands) Value(1) Total Level 1 Level 2 Level 3 ASSETS Cash and due from banks, including interest-bearing deposits $ 99,399 $ 99,399 $ 99,399 $ — $ — Securities available-for-sale 660,963 660,963 — 660,963 — Loans held for sale 35,321 35,500 — — 35,500 Portfolio loans, net of unearned income 5,027,612 5,001,004 — — 5,001,004 Bank owned life insurance 70,175 70,175 — 70,175 — FHLB and other restricted stock 23,032 23,032 — — 23,032 Trading securities held in a Rabbi Trust 4,021 4,021 4,021 — — Mortgage servicing rights 3,237 3,396 — — 3,396 Interest rate swaps 11,295 11,295 — 11,295 — Interest rate lock commitments 261 261 — 261 — LIABILITIES Deposits $ 4,876,611 $ 4,881,718 $ — $ — $ 4,881,718 Securities sold under repurchase agreements 62,086 62,086 — — 62,086 Short-term borrowings 356,000 356,000 — — 356,000 Long-term borrowings 117,043 117,859 — — 117,859 Junior subordinated debt securities 45,619 45,619 — — 45,619 Interest rate swaps 11,276 11,276 — 11,276 — Forward sale contracts 5 5 — 5 — (1) As reported in the Consolidated Balance Sheets
Fair Value Measurements at December 31, 2014 Carrying (dollars in thousands) Value(1) Total Level 1 Level 2 Level 3 ASSETS Cash and due from banks, including interest-bearing deposits $ 109,580 $ 109,580 $ 109,580 $ — $ — Securities available-for-sale 640,273 640,273 178 640,095 — Loans held for sale 2,970 2,991 — — 2,991 Portfolio loans, net of unearned income 3,868,746 3,827,634 — — 3,827,634 Bank owned life insurance 62,252 62,252 — 62,252 — FHLB and other restricted stock 15,135 15,135 — — 15,135 Trading securities held in a Rabbi Trust 3,456 3,456 3,456 — — Mortgage servicing rights 2,817 2,934 — — 2,934 Interest rate swaps 12,981 12,981 — 12,981 — Interest rate lock commitments 235 235 — 235 — LIABILITIES Deposits $ 3,908,842 $ 3,910,342 $ — $ — $ 3,910,342 Securities sold under repurchase agreements 30,605 30,605 — — 30,605 Short-term borrowings 290,000 290,000 — — 290,000 Long-term borrowings 19,442 20,462 — — 20,462 Junior subordinated debt securities 45,619 45,619 — — 45,619 Interest rate swaps 12,953 12,953 — 12,953 — Forward sale contracts 57 57 — 57 — (1) As reported in the Consolidated Balance Sheets
80 NOTE 5. 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. The required reserves averaged $44.1 million for the year ended 2015, $41.8 million for the year ended 2014 and $39.7 million for the year ended 2013.
NOTE 6. DIVIDEND AND LOAN RESTRICTIONS
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 state laws and regulations that limit the amount of dividends it can pay to 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 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 and may be prohibited by applicable Federal Reserve guidelines. Federal law prohibits us 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 surplus. om10-K Form
81 NOTE 7. SECURITIES AVAILABLE-FOR-SALE The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:
December 31, 2015 December 31, 2014 Gross Gross Gross Gross Amortized Unrealized Unrealized Amortized Unrealized Unrealized (dollars in thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value U.S. Treasury securities $ 14,914 $ 27 $ — $ 14,941 $ 14,873 $ 7 $ — $ 14,880 Obligations of U.S. government corporations and agencies 262,045 1,825 (567) 263,303 268,029 2,334 (1,078) 269,285
Collateralized mortgage obligations of U.S. government corporations and agencies 128,458 693 (316) 128,835 116,897 1,257 (148) 118,006 Residential mortgage-backed securities of U.S. government corporations and agencies 39,185 1,091 (151) 40,125 45,274 1,548 (154) 46,668 Commercial mortgage-backed securities of U.S. government corporations and agencies 69,697 183 (676) 69,204 39,834 232 (393) 39,673 Obligations of states and political subdivisions 128,904 5,988 (6) 134,886 136,977 5,789 (64) 142,702 Debt Securities 643,203 9,807 (1,716) 651,294 621,884 11,167 (1,837) 631,214 Marketable equity securities 7,579 2,090 — 9,669 7,579 1,480 — 9,059 Total $ 650,782 $ 11,897 $ (1,716) $ 660,963 $ 629,463 $ 12,647 $ (1,837) $ 640,273
The following table shows the composition of gross and net realized gains and losses for the periods presented:
Years ended December 31, (dollars in thousands) 2015 2014 2013 Gross realized gains $ — $ 41 $ 5 Gross realized losses (34) — — Net Realized (Losses) Gains $ (34) $ 41 $ 5
The following tables present the fair value and the age of gross unrealized losses by investment category as of the dates presented:
December 31, 2015 Less Than 12 Months 12 Months or More Total Number Number Number of Fair Unrealized of Fair Unrealized of Fair Unrealized (dollars in thousands) Securities Value Losses Securities Value Losses Securities Value Losses Obligations of U.S. government corporations and agencies 10 $ 88,584 $ (379) 2 $ 14,542 $ (188) 12 $ 103,126 $ (567) Collateralized mortgage obligations of U.S. government corporations and agencies 6 61,211 (316) — — — 6 61,211 (316) Residential mortgage-backed securities of U.S. government corporations and agencies 1 7,993 (151) — — — 1 7,993 (151) Commercial mortgage-backed securities of U.S. government corporations and agencies 5 50,839 (450) 1 9,472 (226) 6 60,311 (676) Obligations of states and political subdivisions 1 5,370 (6) — — — 1 5,370 (6) Total Temporarily Impaired Securities 23 $ 213,997 $ (1,302) 3 $ 24,014 $ (414) 26 $ 238,011 $ (1,716)
82 NOTE 7. SECURITIES AVAILABLE-FOR-SALE -- continued
December 31, 2014 Less Than 12 Months 12 Months or More Total Number Number Number of Fair Unrealized of Fair Unrealized of Fair Unrealized (dollars in thousands) Securities Value Losses Securities Value Losses Securities Value Losses Obligations of U.S. government corporations and agencies 4 $ 39,745 $ (207) 8 $ 63,149 $ (871) 12 $ 102,894 $ (1,078) Collateralized mortgage obligations of U.S. government corporations and agencies 1 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 agencies 1 9,998 (25) 2 20,640 (368) 3 30,638 (393) Obligations of states and political subdivisions 1 263 (1) 2 10,756 (63) 3 11,019 (64)
Total Temporarily Impaired Securities 7 $ 59,329 $ (381) 13 $ 103,527 $ (1,456) 20 $ 162,856 $ (1,837)
We do not believe any individual unrealized loss as of December 31, 2015 represents an other than temporary impairment, or OTTI. As of December 31, 2015, the unrealized losses on 26 debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these securities. All debt securities are determined to be investment grade and are paying principal and interest according to the contractual terms of the security. There were no unrealized losses on marketable equity securities at either December 31, 2015 or 2014. We do not intend to sell and it is more likely than not that we will not be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost. The following table displays net unrealized gains and losses, net of tax on securities available for sale included in accumulated other comprehensive income/(loss) for the periods presented:
December 31, 2015 December 31, 2014 Gross Gross Gross Gross Unrealized Unrealized Net Unrealized Unrealized Unrealized Net Unrealized (dollars in thousands) Gains Losses Gains (Losses) Gains Losses Gains (Losses)
Total unrealized gains (losses) on securities available 10-K Form for sale $ 11,897 $ (1,716) $ 10,181 $ 12,647 $ (1,837) $ 10,810 Income tax expense (benefit) 4,164 (601) 3,563 4,426 (643) 3,783
Net unrealized gains (losses), net of tax included in accumulated other comprehensive income(loss) $ 7,733 $ (1,115) $ 6,618 $ 8,221 $ (1,194) $ 7,027
The amortized cost and fair value of securities available-for-sale at December 31, 2015 by contractual maturity are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2015 Amortized (dollars in thousands) Cost Fair Value Due in one year or less $ 46,329 $ 46,510 Due after one year through five years 222,838 224,334 Due after five years through ten years 56,934 58,793 Due after ten years 79,762 83,493 405,863 413,130 Collateralized mortgage obligations of U.S. government corporations and agencies 128,458 128,835 Residential mortgage-backed securities of U.S. government corporations and agencies 39,185 40,125 Commercial mortgage-backed securities of U.S. government corporations and agencies 69,697 69,204 Debt Securities 643,203 651,294 Marketable equity securities 7,579 9,669 Total $ 650,782 $ 660,963
83 NOTE 7. SECURITIES AVAILABLE-FOR-SALE -- continued
At December 31, 2015 and 2014, securities with carrying values of $278.4 million and $289.1 million were pledged for various regulatory and legal requirements.
NOTE 8. LOANS AND LOANS HELD FOR SALE Loans are presented net of unearned income of $3.2 million and $2.1 million at December 31, 2015 and 2014 and net of a discount related to purchase accounting fair value adjustments of $10.9 million and $2.0 million at December 31, 2015 and December 31, 2014. The following table indicates the composition of the acquired and originated loans as of the dates presented:
December 31, (dollars in thousands) 2015 2014 Commercial Commercial real estate $ 2,166,603 $ 1,682,236 Commercial and industrial 1,256,830 994,138 Commercial construction 413,444 216,148 Total Commercial Loans 3,836,877 2,892,522 Consumer Residential mortgage 639,372 489,586 Home equity 470,845 418,563 Installment and other consumer 73,939 65,567 Consumer construction 6,579 2,508 Total Consumer Loans 1,190,735 976,224 Total Portfolio Loans 5,027,612 3,868,746 Loans held for sale 35,321 2,970 Total Loans $ 5,062,933 $ 3,871,716
As of December 31, 2015, our acquired loans from the Merger were $673.3 million including $293.2 million of CRE, $167.7 million of C&I, $69.2 million of commercial construction, $115.6 million of residential mortgage, $27.5 million of home equity, installment and other consumer construction. These acquired loans decreased from the original fair value on March, 2015 of $788.7 million, including $331.6 million of CRE, $184.2 million of C&I, $92.4 million of commercial construction, $116.9 million of residential mortgage, $25.6 million of home equity, $36.1 million of installment and other consumer and $1.9 million of consumer construction. As of December 31, 2015, we had $35.3 million of loans held for sale, which included $23.3 million related to the decision to sell our credit card portfolio and the remaining balance related to mortgages held for sale. We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by monitoring the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments. Total commercial loans represented 76 percent of total portfolio loans at December 31, 2015 and 75 percent of total portfolio loans at December 31, 2014. Within our commercial portfolio, the CRE and Commercial Construction portfolios combined comprised $2.6 billion or 67 percent of total commercial loans and 51 percent of total portfolio loans at December 31, 2015 and 66 percent of total commercial loans and 49 percent of total portfolio loans at December 31, 2014. Of the $2.6 billion of CRE and Commercial Construction loans, $424.0 million were added as a result of the Merger. Further segmentation of the CRE and Commercial Construction portfolios by industry and collateral type reveal no concentration in excess of seven percent of total loans at either December 31, 2015 or December 31, 2014. Our market area includes Pennsylvania and the contiguous states of Ohio, West Virginia, New York and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this market area resulting in a geographic concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data as well as information supplied by our customers. Management believes underwriting guidelines, active monitoring of economic conditions and ongoing review by credit administration mitigates the concentration risk present in the loan portfolio. Our CRE and Commercial Construction portfolios have out-of-market exposure of 5.8 percent of the combined portfolio and 3.0 percent of total loans at December 31, 2015 and 8.0 percent of the combined portfolio and 3.9 percent of total loans at December 31, 2014.
84 NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued
TDRs are loans where we, for economic or legal reasons related to a borrower's financial difficulties, grant a concession to the borrower that we would not otherwise grant. We strive to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed as TDRs. We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, as well as all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan to determine if they should be designated as TDRs. All TDRs are considered to be impaired loans and will be reported as impaired loans for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be collected according to the restructured agreement. Further, all impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements to be returned to accruing status. TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring. The following table summarizes the restructured loans as of the dates presented:
December 31, 2015 December 31, 2014 Performing Nonperforming Total Performing Nonperforming Total (dollars in thousands) TDRs TDRs TDRs TDRs TDRs TDRs Commercial real estate $ 6,822 $ 3,548 $ 10,370 $ 16,939 $ 2,180 $ 19,119 Commercial and industrial 6,321 1,570 7,891 8,074 356 8,430 Commercial construction 5,013 1,265 6,278 5,736 1,869 7,605 Residential mortgage 2,590 665 3,255 2,839 459 3,298 Home equity 3,184 523 3,707 3,342 562 3,904 Installment and other consumer 25 88 113 53 10 63 Total $ 23,955 $ 7,659 $ 31,614 $ 36,983 $ 5,436 $ 42,419 om10-K Form
85 NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued
The following tables present the restructured loans for the 12 months ended December 31:
2015 Pre- Post- Modification Modification Total Outstanding Outstanding Difference Number of Recorded Recorded in Recorded (dollars in thousands) Loans Investment(1) Investment(1) Investment Commercial real estate Principal deferral 2 $ 2,851 $ 1,841 $ (1,010) Maturity date extension 3 438 427 (11) Commercial and industrial Principal deferral 6 661 363 (298) Maturity date extension 2 824 728 (96) Commercial construction Maturity date extension 3 1,434 1,432 (2) Residential mortgage Maturity date extension 8 545 265 (280) Maturity date extension and interest rate reduction 1 207 205 (2) Chapter 7 bankruptcy(2) 7 428 226 (202) Home equity Maturity date extension 1 71 70 (1) Maturity date extension and interest rate reduction 3 203 201 (2) Chapter 7 bankruptcy(2) 23 619 576 (43) Installment and other consumer Chapter 7 bankruptcy(2) 194(5) Total by Concession Type Principal deferral 8 3,512 2,204 (1,308) Maturity date extension and interest rate reduction 4 410 406 (4) Maturity date extension 17 3,312 2,922 (390) Chapter 7 bankruptcy(2) 31 1,056 806 (250) Total 60 $ 8,290 $ 6,338 $ (1,952) (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.
86 NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued
2014
Pre- Post- Modification Modification Total Outstanding Outstanding Difference Number of Recorded( Recorded) in Recorded (dollars in thousands) Loans Investment 1) Investment(1 Investment Commercial real estate Principal deferral 4 $ 1,991 $ 1,965 $ (26) Commercial and industrial Principal deferral 2 381 356 (25) Commercial construction Maturity date extension 1 1,019 974 (45) Residential mortgage Chapter 7 bankruptcy(2) 9 651 634 (17) Home Equity Maturity date extension and interest rate reduction 2 96 95 (1) Maturity date extension 6 349 348 (1) Chapter 7 bankruptcy(2) 15 432 382 (50) Installment and other consumer Chapter 7 bankruptcy(2) 53023(7) Total by Concession Type Principal deferral 6 2,372 2,321 (51) Maturity date extension and interest rate reduction 2 96 95 (1) Maturity date extension 7 1,368 1,322 (46) Chapter 7 bankruptcy(2) 29 1,113 1,039 (74) Total 44 $ 4,949 $ 4,777 $ (172) (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.
During 2015, we modified 39 loans that were not considered to be TDRs, including 11 C&I loans for $7.8 million, 14 Commercial Construction loans for $8.5 million, eight CRE loans for $6.1 million, four Home Equity loans for $0.4 million and 10-K Form two Residential Real Estate loans for $0.1 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, 2015, we have no commitments to lend additional funds on any TDRs. We returned eight TDRs to accruing status during the twelve months ended December 31, 2015 totaling $0.4 million. We returned nine TDRs to accruing status during 2014 totaling $1.9 million. Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place. The following tables present a summary of TDRs which defaulted during the years ended December 31, 2015 and 2014 that had been restructured within the last 12 months prior to defaulting:
Defaulted TDRs For the For the Year Ended Year Ended December 31, 2015 December 31, 2014 Number of Recorded Number of Recorded (dollars in thousands) Defaults Investment Defaults Investment Commercial real estate — $ — — $ — Commercial and industrial — — — — Residential real estate — — 1 20 Home equity —— 244 Total —$ — 3$ 64
87 NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued
The following table is a summary of nonperforming assets as of the dates presented:
December 31, (dollars in thousands) 2015 2014 Nonperforming Assets Nonaccrual loans $ 27,723 $ 7,021 Nonaccrual TDRs 7,659 5,436 Total nonaccrual loans 35,382 12,457 OREO 354 166 Total Nonperforming Assets $ 35,736 $ 12,623
The increase in NPAs during 2015 was primarily due to subsequent deterioration on acquired loans since the acquisition date and a $4.7 million C&I loan. Included in the total NPAs of $35.7 million is approximately $16.3 million of loans from the Merger. 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:
(dollars in thousands) 2015 2014 Balance at beginning of year $ 27,368 $ 23,848 New loans 24,743 27,799 Repayments (27,594) (24,279) Balance at End of Year $ 24,517 $ 27,368
NOTE 9. 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. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer. The following are key risks within each portfolio segment:
CRE—Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied.
C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.
Commercial Construction—Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be complete, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.
Consumer Real Estate—Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of
88 NOTE 9. ALLOWANCE FOR LOAN LOSSES -- continued risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.
Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and LTV ratio for Consumer Real Estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment. The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is LEP. The LEP is an estimate of the average amount of time from the point at which a loss is incurred on a loan to the point at which the loss is confirmed. Another key assumption is LBP, which represents the historical data period utilized to calculate loss rates. Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis. The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented:
December 31, 2015 Total 30-59 Days 60-89 Days Non- Past Due (dollars in thousands) Current Past Due Past Due performing Loans Total Loans Commercial real estate $ 2,145,655 $ 11,602 $ 627 $ 8,719 $ 20,948 $ 2,166,603 Commercial and industrial 1,244,802 2,453 296 9,279 12,028 1,256,830 Commercial construction 401,084 3,517 90 8,753 12,360 413,444 Residential mortgage 631,085 1,728 930 5,629 8,287 639,372 Home equity 465,055 2,365 523 2,902 5,790 470,845 Installment and other consumer 73,486 242 111 100 453 73,939 Consumer construction 6,579————6,579
Loans held for sale 35,179 94 48 — 142 35,321 10-K Form Total $ 5,002,925 $ 22,001 $ 2,625 $ 35,382 $ 60,008 $ 5,062,933
December 31, 2014 Total 30-59 Days 60-89 Days Non- Past Due (dollars in thousands) Current Past Due Past Due performing Loans Total Loans Commercial real estate $ 1,674,930 $ 2,548 $ 323 $ 4,435 $ 7,306 $ 1,682,236 Commercial and industrial 991,136 1,227 153 1,622 3,002 994,138 Commercial construction 214,174 — — 1,974 1,974 216,148 Residential mortgage 485,465 565 1,220 2,336 4,121 489,586 Home equity 414,303 1,756 445 2,059 4,260 418,563 Installment and other consumer 65,111 352 73 31 456 65,567 Consumer construction 2,508————2,508 Loans held for sale 2,970————2,970 Total $ 3,850,597 $ 6,448 $ 2,214 $ 12,457 $ 21,119 $ 3,871,716
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. 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
89 NOTE 9. ALLOWANCE FOR LOAN LOSSES -- continued position at some future date. Economic and market conditions, beyond the borrower’s control, may in the future necessitate this classification. Substandard—A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:
December 31, 2015 Commercial % of Commercial % of Commercial % of % of (dollars in thousands) Real Estate Total and Industrial Total Construction Total Total Total Pass $ 2,094,851 96.7 % $ 1,182,685 94.1 % $ 375,808 90.9 % $ 3,653,344 95.2 % Special mention 19,938 0.9 % 43,896 3.5 % 19,846 4.8 % 83,680 2.2 % Substandard 51,814 2.4 % 30,249 2.4 % 17,790 4.3 % 99,853 2.6 % Total $ 2,166,603 100.0% $ 1,256,830 100.0% $ 413,444 100.0% $ 3,836,877 100.0%
December 31, 2014 Commercial % of Commercial % of Commercial % of % of (dollars in thousands) Real Estate Total and Industrial Total Construction Total Total Total Pass $ 1,635,132 97.2 % $ 948,663 95.4 % $ 196,520 90.9 % $ 2,780,315 96.1 % Special mention 23,597 1.4 % 30,357 3.1 % 12,014 5.6 % 65,968 2.3 % Substandard 23,507 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%
We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans. The following tables present the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented:
December 31, 2015 Installment (dollars in Residential % of Home % of and other % of Consumer % of % of thousands) Mortgage Total Equity Total consumer Total Construction Total Total Total Performing $ 633,743 99.1 % $ 467,943 99.4 % $ 73,839 99.8 % $ 6,579 100.0 % $ 1,182,104 99.3 % Nonperforming 5,629 0.9 % 2,902 0.6 % 100 0.2 % — — % 8,631 0.7 % Total $ 639,372 100.0% $ 470,845 100.0% $ 73,939 100.0% $ 6,579 100.0% $ 1,190,735 100.0%
December 31, 2014 Installment (dollars in Residential % of Home % of and other % of Consumer % of % of thousands) Mortgage Total Equity Total consumer Total Construction Total Total Total Performing $ 487,250 99.5 % $ 416,504 99.5 % $ 65,536 99.9 % $ 2,508 100.0 % $ 971,798 99.5 % Nonperforming 2,336 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%
We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All TDRs will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.
90 NOTE 9. ALLOWANCE FOR LOAN LOSSES -- continued
The following tables summarize investments in loans considered to be impaired and related information on those impaired loans as of the dates presented:
December 31, 2015 December 31, 2014 Unpaid Unpaid Recorded Principal Related Recorded Principal Related (dollars in thousands) Investment Balance Allowance Investment Balance Allowance With a related allowance recorded: Commercial real estate $ — $ — $ — $ — $ — $ — Commercial and industrial — — — — — — Commercial construction 500 1,350 3 — — — Consumer real estate 116 116 32 43 43 43 Other consumer 222202011 Total with a Related Allowance Recorded 618 1,468 37 63 63 54 Without a related allowance recorded: Commercial real estate 12,661 13,157 — 19,890 25,262 — Commercial and industrial 14,417 15,220 — 9,218 9,449 — Commercial construction 10,998 14,200 — 7,605 11,293 — Consumer real estate 6,845 7,521 — 7,159 7,733 — Other consumer 111 188 — 42 48 — Total without a Related Allowance Recorded 45,032 50,286 — 43,914 53,785 — Total: Commercial real estate 12,661 13,157 — 19,890 25,262 — Commercial and industrial 14,417 15,220 — 9,218 9,449 — Commercial construction 11,498 15,550 3 7,605 11,293 — Consumer real estate 6,961 7,637 32 7,202 7,776 43 Other consumer 113 190 2 62 68 11 Total $ 45,650 $ 51,754 $ 37 $ 43,977 $ 53,848 $ 54
As of December 31, 2015, we had $45.7 million of impaired loans which included $9.9 million of acquired loans that experienced credit deterioration since the acquisition date. 10-K Form
91 NOTE 9. 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 presented:
For the Year Ended December 31, 2015 December 31, 2014 Average Interest Average Interest Recorded Income Recorded Income (dollars in thousands) Investment Recognized Investment Recognized With a related allowance recorded: Commercial real estate $ — $ — $ — $ — Commercial and industrial — — — — Commercial construction 834 — — — Consumer real estate 120 7 48 4 Other consumer 2 — 24 2 Total with a Related Allowance Recorded 956 7 72 6 Without a related allowance recorded: Commercial real estate 14,622 597 20,504 684 Commercial and industrial 14,416 450 9,246 241 Commercial construction 10,581 329 8,145 227 Consumer real estate 6,902 364 7,027 396 Other consumer 117 1 56 2 Total without a Related Allowance Recorded 46,638 1,741 44,978 1,550 Total: Commercial real estate 14,622 597 20,504 684 Commercial and industrial 14,416 450 9,246 241 Commercial construction 11,415 329 8,145 227 Consumer real estate 7,022 371 7,075 400 Other consumer 119 1 80 4 Total $ 47,594 $ 1,748 $ 45,050 $ 1,556
The following tables detail activity in the ALL for the periods presented:
2015 Commercial Commercial Commercial Consumer Other (dollars in thousands) Real Estate and Industrial Construction Real Estate Consumer Total Loans Balance at beginning of year $ 20,164 $ 13,668 $ 6,093 $ 6,333 $ 1,653 $ 47,911 Charge-offs (2,787) (5,463) (3,321) (2,167) (1,528) (15,266) Recoveries 3,545 605 143 495 326 5,114 Net Recoveries (Charge-offs) 758 (4,858) (3,178) (1,672) (1,202) (10,152) Provision for loan losses (5,879) 2,043 9,710 3,739 775 10,388 Balance at End of Year $ 15,043 $ 10,853 $ 12,625 $ 8,400 $ 1,226 $ 48,147
2014 Commercial Commercial Commercial Consumer Other (dollars in thousands) Real Estate and Industrial Construction Real Estate 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) Recoveries 1,798 3,647 146 350 353 6,294 Net (Charge-offs)/ Recoveries (243) 2,380 (566) (850) (780) (59) Provision for loan losses 1,486 (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
Loans acquired in the Merger were recorded at fair value with no carryover of the ALL. As of December 31, 2015, acquired loans from the Merger of $673.3 million were outstanding, which decreased from $788.7 million at the Merger date.
92 NOTE 9. ALLOWANCE FOR LOAN LOSSES -- continued
Additional credit deterioration on acquired loans during 2015, in excess of the original credit discount embedded in the fair value determination on the date of acquisition, was recognized in the ALL through the provision for loan losses. The following tables present the ALL and recorded investments in loans by category as of December 31:
2015 Allowance for Loan Losses Portfolio Loans Individually Collectively Individually Collectively Evaluated for Evaluated for Evaluated for Evaluated for (dollars in thousands) Impairment Impairment Total Impairment Impairment Total Commercial real estate $ — $ 15,043 $ 15,043 $ 12,661 $ 2,153,942 $ 2,166,603 Commercial and industrial — 10,853 10,853 14,417 1,242,413 1,256,830 Commercial construction 3 12,622 12,625 11,498 401,946 413,444 Consumer real estate 32 8,368 8,400 6,961 1,109,835 1,116,796 Other consumer 2 1,224 1,226 113 73,826 73,939 Total $ 37 $ 48,110 $ 48,147 $ 45,650 $ 4,981,962 $ 5,027,612
2014 Allowance for Loan Losses Portfolio Loans Individually Collectively Individually Collectively Evaluated for Evaluated for Evaluated for Evaluated for (dollars in thousands) Impairment Impairment Total Impairment 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 estate 43 6,290 6,333 7,202 903,455 910,657 Other consumer 11 1,642 1,653 62 65,505 65,567 Total $ 54 $ 47,857 $ 47,911 $ 43,977 $ 3,824,769 $ 3,868,746
NOTE 10. PREMISES AND EQUIPMENT The following table is a summary of premises and equipment as of the dates presented: om10-K Form
December 31, (dollars in thousands) 2015 2014 Land $ 8,699 $ 6,193 Premises 52,968 44,690 Furniture and equipment 29,543 26,661 Leasehold improvements 7,186 6,545 98,396 84,089 Accumulated depreciation (49,269) (45,923) Total $ 49,127 $ 38,166
Depreciation expense related to premises and equipment was $4.7 million in 2015, $3.5 million in 2014 and $3.5 million in 2013. Certain banking facilities are leased under arrangements expiring at various dates until the year 2054. We account for these leases on a straight-line basis due to escalation clauses. All leases are accounted for as operating leases, except for one capital lease. Rental expense for premises amounted to $3.9 million, $2.7 million and $2.5 million in 2015, 2014 and 2013. Included in the rental expense for premises are leases entered into with two S&T directors, which totaled $0.2 million each year in 2015, 2014 and 2013.
93 NOTE 10. PREMISES AND EQUIPMENT -- continued
Minimum annual rental and renewal option payments for each of the following five years and thereafter are approximately:
(dollars in thousands) Operating Capital Total 2016 $ 2,860 $ 76 $ 2,936 2017 2,895 76 2,971 2018 2,899 76 2,975 2019 2,913 77 2,990 2020 2,857 77 2,934 Thereafter 53,107 610 53,717 Total $ 67,531 $ 992 $ 68,523
NOTE 11. GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents goodwill as of the dates presented:
December 31, (dollars in thousands) 2015 2014 Balance at beginning of year $ 175,820 $ 175,820 Additions 115,944 — Balance at End of Year $ 291,764 $ 175,820
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Additional goodwill of $115.9 million was recorded during 2015, for our acquisition of Integrity. Refer to Note 2 Business Combinations for further details on the Integrity acquisition. There were no additions to goodwill in 2014. Goodwill is reviewed for impairment annually or more frequently if it is determined that a triggering event has occurred. Based upon our qualitative assessment performed for our annual impairment analysis, we concluded that it is more likely than not that the fair value of the reporting units exceeds the carrying value. In 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 it is more likely than not that the fair value of the reporting units would be less than the carrying value. The following table shows a summary of intangible assets as of the dates presented:
December 31, (dollars in thousands) 2015 2014 Gross carrying amount at beginning of year $ 16,401 $ 16,401 Additions 5,713 — Accumulated amortization (15,589) (13,770) Balance at End of Year $ 6,525 $ 2,631
Intangible assets as of December 31, 2015 consisted of $6.1 million for core deposits, $0.1 million for wealth management relationships and $0.4 million for insurance contract relationships resulting from acquisitions. The addition of $5.7 million during 2015 was due to the core deposit intangible asset related to the acquisition of Integrity. We determined the amount of identifiable intangible assets based upon independent core deposit, wealth management and insurance contract valuations. Other intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. There were no triggering events in 2015 requiring an impairment analysis to be completed. Amortization expense on finite-lived intangible assets totaled $1.8 million, $1.1 million and $1.6 million for 2015, 2014 and 2013. 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, 2015:
(dollars in thousands) Amount 2016 $ 1,433 2017 1,149 2018 668 2019 561 2020 475 Total $ 4,286
94 NOTE 11. GOODWILL AND OTHER INTANGIBLE ASSETS -- continued
NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The following table indicates the amount representing the value of derivative assets and derivative liabilities at December 31:
Derivatives (included in Derivatives (included Other Assets) in Other Liabilities) (dollars in thousands) 2015 2014 2015 2014 Derivatives not Designated as Hedging Instruments Interest Rate Swap Contracts—Commercial Loans Fair value $ 11,295 $ 12,981 $ 11,276 $ 12,953 Notional amount 245,595 245,152 245,595 245,152 Collateral posted — — 12,753 12,059 Interest Rate Lock Commitments—Mortgage Loans Fair value 261 235 — — Notional amount 9,894 8,822 — — Forward Sale Contracts—Mortgage Loans Fair value —— 557 Notional amount — — 9,800 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 Derivatives (included in Other Assets) in Other Liabilities) (dollars in thousands) 2015 2014 2015 2014 Derivatives not Designated as Hedging Instruments Gross amounts recognized $ 11,295 $ 13,203 $ 11,276 $ 13,175 Gross amounts offset — (222) — (222) Net amounts presented in the Consolidated Balance Sheets 11,295 12,981 11,276 12,953 (1) Gross amounts not offset — — (12,573) (12,059) 10-K Form Net Amount $ 11,295 $ 12,981 $ (1,297) $ 894 (1) Amounts represent posted collateral. The following table indicates the gain or loss recognized in income on derivatives for the years ended December 31:
(dollars in thousands) 2015 2014 2013 Derivatives not Designated as Hedging Instruments Interest rate swap contracts—commercial loans $ (8) $ (24) $ (174) Interest rate lock commitments—mortgage loans 26 150 (382) Forward sale contracts—mortgage loans 52 (90) 82 Total Derivative Gain (Loss) $ 70 $ 36 $ (474)
NOTE 13. MORTGAGE SERVICING RIGHTS For the years ended December 31, 2015, 2014 and 2013, the 1-4 family mortgage loans that were sold to Fannie Mae amounted to $76.8 million, $40.1 million and $62.9 million. At December 31, 2015, 2014 and 2013 our servicing portfolio totaled $361.2 million, $325.8 million and $327.4 million. The following table indicates MSRs and the net carrying values:
95 Servicing Valuation Net Carrying (dollars in thousands) Rights Allowance Value Balance at December 31, 2013 $ 3,208 $ (289) $ 2,919 Additions 431 — 431 Amortization (531) — (531) Temporary (impairment) recapture — (2) (2) Balance at December 31, 2014 $ 3,108 $ (291) $ 2,817 Additions 856 — 856 Amortization (538) — (538) Temporary (impairment) recapture — 102 102 Balance at December 31, 2015 $ 3,426 $ (189) $ 3,237
NOTE 14. QUALIFIED AFFORDABLE HOUSING
We invest in affordable housing projects primarily to satisfy our Community Reinvestment Act requirements. As a limited partner in these operating partnerships, we receive tax credits and tax deductions for losses incurred by the underlying properties. We use the cost method to account for these partnerships. Our total investment in qualified affordable housing projects was $15.0 million at December 31, 2015 and $18.6 million at December 31, 2014. We had no open commitments to fund current or future investments in qualified affordable housing projects at December 31, 2015 or December 31, 2014. Amortization expense, included in other noninterest expense in the Consolidated Statements of Net Income, was $3.6 million for December 31, 2015 and $4.1 million for both December 31, 2014 and 2013. Amortization expense was offset by tax credits of $4.0 million for December 31, 2015 and $4.3 million for both December 31, 2014 and 2013, as a reduction to our federal tax provision.
NOTE 15. DEPOSITS The following table presents the composition of deposits at December 31 and interest expense for the years ended December 31:
2015 2014 2013 Interest Interest Interest (dollars in thousands) Balance Expense Balance Expense Balance Expense Noninterest-bearing demand $ 1,227,766 $ — $ 1,083,919 $ — $ 992,779 $ — Interest-bearing demand 616,188 818 335,099 19 312,790 75 Money market 605,184 1,299 376,612 572 281,403 446 Savings 1,061,265 1,712 1,027,095 1,607 994,805 1,735 Certificates of deposit 1,366,208 9,115 1,086,117 7,930 1,090,531 9,150 Total $ 4,876,611 $ 12,944 $ 3,908,842 $ 10,128 $ 3,672,308 $ 11,406
The aggregate of all certificates of deposit over $100,000, including CDARS, amounted to $521.6 million and $382.2 million at December 31, 2015 and 2014. The following table indicates the scheduled maturities of certificates of deposit at December 31, 2015:
(dollars in thousands) Amount 2016 $ 870,679 2017 304,820 2018 102,886 2019 37,742 2020 41,808 Thereafter 8,273 Total $ 1,366,208
NOTE 16. SHORT-TERM BORROWINGS Short-term borrowings are for terms under one year and were comprised of REPOs and FHLB advances. REPOs are overnight short-term investments and are not insured by the Federal Deposit Insurance Corporation, or FDIC. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and are 96 therefore accounted for as a secured borrowing. Securities with a total carrying value of $67.0 million at December 31, 2015 and $35.6 million at December 31, 2014 were pledged as collateral for these secured transactions. The pledged securities are held in safekeeping at the Federal Reserve. Due to the overnight short-term nature of REPOs, potential risk due to a decline in the value of the pledged collateral is low. Collateral pledging requirements with REPOs are monitored daily. The following table represents the composition of short-term borrowings, the weighted average interest rate as of December 31 and interest expense for the years ended December 31:
2015 2014 2013 Weighted Weighted Weighted Average Average Average Interest Interest Interest Interest Interest Interest (dollars in thousands) Balance Rate Expense Balance Rate Expense Balance Rate Expense REPOs $ 62,086 0.01 % $ 4 $ 30,605 0.01 % $ 3 $ 33,847 0.01 % $ 62 FHLB advances 356,000 0.52 % 932 290,000 0.31 % 511 140,000 0.30 % 279 Total Short-term Borrowings $ 418,086 0.44% $ 936 $ 320,605 0.27% $ 514 $ 173,847 0.24% $ 341
NOTE 17. LONG-TERM BORROWINGS AND SUBORDINATED DEBT Long-term borrowings are for original terms greater than or equal to one year and were comprised of FHLB advances, a capital lease and junior subordinated debt securities. Our long-term borrowings at the Pittsburgh FHLB were $117.0 million as of December 31, 2015 and $19.3 million as of December 31, 2014. FHLB borrowings are secured by a blanket lien on residential mortgages and other real estate secured loans. Total loans pledged as collateral at the FHLB were $2.8 billion at December 31, 2015. We were eligible to borrow up to an additional $1.4 billion based on qualifying collateral, to a maximum borrowing capacity of $1.9 billion at December 31, 2015. The following table represents the balance of long-term borrowings, the weighted average interest rate as of December 31 and interest expense for the years ended December 31:
(dollars in thousand) 2015 2014 2013 Long-term borrowings $ 117,043 $ 19,442 $ 21,810 Weighted average interest rate 0.81% 3.00% 3.01% Interest expense $ 790 $ 617 $ 746
Scheduled annual maturities and average interest rates for all of our long-term debt, including a capital lease of $0.2
million, for each of the five years and thereafter subsequent to December 31, 2015 are as follows: 10-K Form
(dollars in thousands) Balance Average Rate 2016 $ 102,330 0.52 % 2017 2,412 3.52 % 2018 2,496 3.60 % 2019 2,514 3.13 % 2020 2,004 3.22 % Thereafter 5,287 1.85 % Total $ 117,043 0.81%
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:
2015 2014 2013 Interest Interest Interest (dollars in thousands) Balance Expense Balance Expense Balance Expense 2006 Junior subordinated debt $ 25,000 $ 554 $ 25,000 $ 463 $ 25,000 $ 475 2008 Junior subordinated debt—trust preferred securities 20,619 773 20,619 759 20,619 770 2008 Junior subordinated debt — — — — — 422 2008 Junior subordinated debt — — — — — 403 Total $ 45,619 $ 1,327 $ 45,619 $ 1,222 $ 45,619 $ 2,070
97 NOTE 17. LONG-TERM BORROWINGS AND SUBORDINATED DEBT -- continued
The following table summarizes the key terms of our junior subordinated debt securities:
2006 Junior 2008 Trust 2008 Junior 2008 Junior (dollars in thousands) Subordinated Debt Preferred Securities Subordinated Debt Subordinated Debt Junior Subordinated Debt $25,000 — $20,000 $25,000 Trust Preferred Securities — $20,619 — — Stated Maturity Date 12/15/2036 3/15/2038 6/15/2018 5/30/2018
Optional redemption date at par Any time after 9/15/2011 Any time after 3/15/2013 Any time after 6/15/2013 Any time after 5/30/2013 Regulatory Capital Tier 2 Tier 1 Tier 2 Tier 2 3 month LIBOR plus 160 3 month LIBOR plus 350 3 month LIBOR plus 350 3 month LIBOR plus 250 Interest Rate bps bps bps bps Interest Rate at December 31, 2015 2.11% 4.01% —% —%
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 of 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 VIE, but is not consolidated into our financial statements. STBA Capital Trust I pays dividends on the securities at the same rate as the interest 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 of 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. On March 4, 2015 we assumed a $13.5 million junior subordinated debt from the acquisition of Integrity. On March 5, 2015, we paid off $8.5 million and on June 18, 2015, we paid off the remaining $5.0 million.
98 NOTE 18. COMMITMENTS AND CONTINGENCIES Commitments The following table sets forth our commitments and letters of credit as of the dates presented:
December 31, (dollars in thousands) 2015 2014 Commitments to extend credit $ 1,619,854 $ 1,158,628 Standby letters of credit 97,676 73,584 Total $ 1,717,530 $ 1,232,212
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 $2.5 million at December 31, 2015 and $2.3 million at December 31, 2014. We have future commitments with third party vendors for data processing and communication charges. Data processing and communication expense was $11.7 million, $9.8 million and $9.5 million for 2015, 2014 and 2013. Included in expense was $1.3 million of one-time merger related expenses in 2015, no data processing and communication merger related expenses in 2014 and $0.8 million in one-time merger related expenses in 2013. The following table sets forth the future estimated payments related to data processing and communication charges for each of the five years following December 31, 2015:
(dollars in thousands) Total 2016 $ 11,360 2017 11,743 2018 12,123 2019 12,527 2020 12,951 Total $ 60,704
Litigation In the normal course of business, we are subject to various legal and administrative proceedings and claims. While any om10-K Form type of litigation contains a level of uncertainty, we believe that the outcome of such proceedings or claims pending will not have a material adverse effect on our consolidated financial position or results of operations.
NOTE 19. INCOME TAXES
Income tax expense (benefit) for the years ended December 31 is comprised of:
(dollars in thousands) 2015 2014 2013 Current $ 24,825 $ 15,979 $ 16,836 Deferred (427) 1,536 (2,358) Total $ 24,398 $ 17,515 $ 14,478
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 than the statutory rate of 35 percent primarily due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on BOLI and tax benefits associated with LIHTC from certain partnership investments.
99 NOTE 19. INCOME TAXES -- continued
The statutory to effective tax rate reconciliation for the years ended December 31 is as follows:
2015 2014 2013 Statutory tax rate 35.0 % 35.0 % 35.0 % Low income housing tax credits (4.4)% (5.8)% (6.8)% Tax-exempt interest (4.1)% (4.6)% (4.5)% Bank owned life insurance (0.8)% (0.8)% (1.0)% Other 1.0 % (0.6)% (0.4)% Effective Tax Rate 26.7 % 23.2 % 22.3 %
Significant components of our temporary differences were as follows at December 31:
(dollars in thousands) 2015 2014 Deferred Tax Liabilities: Net unrealized holding gains on securities available-for-sale $ (3,563) $ (3,783) Prepaid pension (2,865) (3,472) Deferred loan income (2,847) (2,165) Purchase accounting adjustments — (631) Depreciation on premises and equipment (1,226) (1,590) Other (809) (812) Total Deferred Tax liabilities (11,310) (12,453) Deferred Tax Assets: Allowance for loan losses 17,740 17,567 Purchase accounting adjustments 1,298 — Other employee benefits 2,556 2,453 Low income housing partnerships 4,531 4,049 Net adjustment to funded status of pension 12,425 11,089 Impairment of securities 1,354 1,313 State net operating loss carryforwards 2,670 2,249 Other 6,155 4,668 Gross Deferred Tax Assets 48,729 43,388 Less: Valuation allowance (2,670) (2,249) Total Deferred Tax Assets 46,059 41,139 Net Deferred Tax Asset $ 34,749 $ 28,686
The Merger accounted for $12.6 million of gross deferred tax items contributing approximately $4.2 million to the increase in net deferred tax assets of $6.1 million at December 31, 2015. 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 losses, or 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. The 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 $2.7 million in 2015 related to Pennsylvania income tax NOLs. The Pennsylvania NOL carryforwards total $26.7 million and will expire in the years 2020-2035.
100 NOTE 19. INCOME TAXES -- continued
Unrecognized Tax Benefits
The following table reconciles the change in Federal and State gross unrecognized tax benefits, or UTB, for the years ended December 31:
(dollars in thousands) 2015 2014 2013 Balance at beginning of year $ 284 $ 1,902 $ 978 Prior period tax positions Increase 818 55 924 Decrease — (1,673) — Current period tax positions ——— Reductions for statute of limitations expirations — — — Balance at End of Year $ 1,102 $ 284 $ 1,902 Amount That Would Impact the Effective Tax Rate if Recognized $ 542 $ 184 $ 148
We classify interest and penalties as an element of tax expense. We monitor changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. As of December 31, 2015, no significant changes to UTB are projected, however, tax audit examinations are possible. The UTB balance for the years ended December 31 include a cumulative amount of $0.1 million related to interest as of December 31, 2015 and 2014 and a cumulative amount of $0.3 million related to interest as of December 31, 2013 in the Consolidated Balance Sheets. We recognized an insignificant amount of interest in 2015 and 2014 and $0.2 million of interest in 2013 in the Consolidated Statements of Net Income. As of December 31, 2015, all income tax returns filed for the tax years 2012 through 2014 remain subject to examination by the IRS. Currently, our income tax return for the 2013 tax year is under examination by the IRS. We do not expect that the results of this examination will have a material effect on our financial condition or results of operations.
NOTE 20. 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:
Pre-Tax Tax (Expense) Net of Tax (dollars in thousands) Amount Benefit Amount om10-K Form 2015 Net change in unrealized gains on securities available-for-sale $ (663) $ 232 $ (431) Net available-for-sale securities losses reclassified into earnings 34 (12) 22 Adjustment to funded status of employee benefit plans (3,551) 1,336 (2,215) Other Comprehensive Income (Loss) $ (4,180) $ 1,556 $ (2,624) 2014 Net change in unrealized losses 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 gains 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 plans 18,299 (6,405) 11,894 Other Comprehensive Income (Loss) $ 1,366 $ (478) $ 888
101 NOTE 21. EMPLOYEE BENEFITS
We maintain a qualified defined benefit pension plan, or Plan, covering substantially all employees hired prior to January 1, 2008. The benefits are based on years of service and the employee’s compensation for the highest five consecutive years in the last ten years. Contributions are intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future. 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:
(dollars in thousands) 2015 2014 Change in Projected Benefit Obligation Projected benefit obligation at beginning of year $ 113,124 $ 95,969 Service cost 2,601 2,369 Interest cost 4,425 4,470 Actuarial (gain) loss (4,257) 16,020 Benefits paid (6,146) (5,704) Projected Benefit Obligation at End of Year $ 109,747 $ 113,124 Change in Plan Assets Fair value of plan assets at beginning of year $ 93,486 $ 89,556 Actual return on plan assets (2,755) 9,634 Benefits paid (6,146) (5,704) Fair Value of Plan Assets at End of Year $ 84,585 $ 93,486 Funded Status $ (25,162) $ (19,638)
The following table sets forth the amounts recognized in accumulated other comprehensive income (loss) at December 31:
(dollars in thousands) 2015 2014 Prior service credit $ (1,029) $ (1,167) Net actuarial loss 34,376 30,726 Total (Before Tax Effects) $ 33,347 $ 29,559
Below are the actuarial weighted average assumptions used in determining the benefit obligation:
2015 2014 Discount rate 4.25% 4.00% Rate of compensation increase 3.00% 3.00%
The following table summarizes the components of net periodic pension cost and other changes in Plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended December 31:
(dollars in thousands) 2015 2014 2013 Components of Net Periodic Pension Cost Service cost—benefits earned during the period $ 2,601 $ 2,369 $ 2,767 Interest cost on projected benefit obligation 4,425 4,470 3,985 Expected return on plan assets (7,180) (6,907) (6,207) Amortization of prior service credit (138) (137) (138) Recognized net actuarial loss 2,028 941 2,425 Net Periodic Pension Expense $ 1,736 $ 736 $ 2,832 Other Changes in Plan Assets and Benefit Obligation Recognized in Other Comprehensive Income (Loss) Net actuarial loss (gain) $ 5,678 $ 13,294 $ (15,499) Recognized net actuarial loss (2,028) (941) (2,425) Recognized prior service credit 138 137 138 Total (Before Tax Effects) $ 3,788 $ 12,490 $ (17,786) Total Recognized in Net Benefit Cost and Other Comprehensive Income (Loss) (Before Tax Effects) $ 5,524 $ 13,226 $ (14,954)
102 NOTE 21. EMPLOYEE BENEFITS -- continued
The following table summarizes the actuarial weighted average assumptions used in determining net periodic pension cost:
2015 2014 2013 Discount rate 4.00% 4.75% 4.00% Rate of compensation increase 3.00% 3.00% 3.00% Expected return on assets 8.00% 8.00% 8.00%
The net actuarial loss included in accumulated other comprehensive income (loss) expected to be recognized in net periodic pension cost during the year ended December 31, 2016 is $2.3 million. The prior service credit expected to be recognized during the same period is $0.1 million. The accumulated benefit obligation for the Plan was $101.6 million at December 31, 2015 and $104.3 million at December 31, 2014. 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. At this time, S&T Bank is not required to make a cash contribution to the Plan in 2016. No contributions were made during 2015. 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:
(dollars in thousands) Amount
2016 $ 6,455 2017 6,250 2018 6,643 2019 6,676 2020 7,298 om10-K Form 2021 - 2025 38,488
We also have nonqualified supplemental executive pension plans, or SERPs, for certain key employees. The SERPs are unfunded. The projected benefit obligations related to the SERPs were $4.0 million and $3.5 million at December 31, 2015 and 2014. 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 $0.6 million, $0.4 million and $0.4 million for each of the years ended December 31, 2015, 2014 and 2013. Additionally, $2.1 million before tax was reflected in accumulated other comprehensive income (loss) at both December 31, 2015 and 2014, in relation to the SERPs. The actuarial assumptions used for the SERPs are the same as those used for the Plan. On January 25, 2016, the Board of Directors approved an amendment to freeze benefit accruals under the qualified and nonqualified defined benefit pension plans effective March 31, 2016. This change will result in no additional benefits being earned by participants in those plans based on service or pay after March 31, 2016. The Plan was previously closed to new participants effective December 31, 2007. 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 $1.5 million in 2015, $1.3 million in 2014 and $1.4 million in 2013.
Fair Value Measurements
The following tables present our Plan assets measured at fair value on a recurring basis by fair value hierarchy level at December 31, 2015 and 2014. There were no transfers between Level 1 and Level 2 for items of a recurring basis during the periods presented. There were no purchases or transfers of Level 3 plan assets in 2015.
103 NOTE 21. EMPLOYEE BENEFITS -- continued
December 31, 2015 Fair Value Asset Classes(1) (dollars in thousands) Level 1 Level 2 Level 3 Total Cash and cash equivalents(2) $ — $ 3,371 $ — $ 3,371 Fixed income(3) 27,054 — — 27,054 Equities: Equity index mutual funds—international(4) 3,421 — — 3,421 Domestic individual equities(5) 50,739 — — 50,739 Total Assets at Fair Value $ 81,214 $ 3,371 $ — $ 84,585 (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 invest 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 the Harbor International Institutional Fund. (5) This asset class includes individual domestic equities invested in an active all-cap strategy. It may also include convertible bonds.
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) 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 invest 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 MSCI EAFE Index iShares. (5) This asset class includes individual domestic equities invested in an active all-cap strategy. It may also include convertible bonds. (6) This asset class includes American Depository Receipts.
NOTE 22. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN
We adopted an Incentive Stock Plan in 2003 that provides for granting incentive stock options, nonstatutory stock options, restricted stock and appreciation rights. The 2003 Stock Plan had a maximum of 1,500,000 shares of our common stock that expired ten years from the date of board approval. No further awards will be granted under the 2003 Stock Plan and there are no awards outstanding under the plan as of December 31, 2015. 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, 2015, no nonstatutory stock options are outstanding under the 2003 Stock Plan or the 2014 Stock Plan. Nonstatutory stock options granted in 2005 are fully vested and had a ten year life. These stock options were fully expensed in 2010. The fair value of nonstatutory stock option awards under the 2003 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 midpoint between the vesting date and the end of the contractual term. There have been no nonstatutory stock options granted since 2006.
104 NOTE 22. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN -- continued
The following table summarizes activity for nonstatutory stock options for the years ended December 31:
2015 2014 2013 Weighted Weighted Weighted Weighted Average Weighted Average Weighted Average Average Remaining Average Remaining Average Remaining Number Exercise Contractual Number of Exercise Contractual Number of Exercise Contractual of Shares Price Term Shares Price Term Shares Price Term Outstanding at beginning of year 155,500 $ 37.86 428,900 $ 37.36 675,500 $ 35.18 Granted — — — — — — Exercised — — — — — — Forfeited — — (273,400) 37.08 (246,600) 31.39 Expired (155,500) 37.86 — — — — Outstanding at End of Year — — 0.0 years 155,500 $ 37.86 1.0 year 428,900 $ 37.36 1.4 years Exercisable at End of Year — — 0.0 years 155,500 $ 37.86 1.0 year 428,900 $ 37.36 1.4 years
The aggregate intrinsic value of options outstanding and exercisable was zero as of December 31, 2014 and 2013. 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 the options on December 31, 2014 and 2013.
Restricted Stock
We periodically issue restricted stock to employees and directors, pursuant to our Stock Plans. As of December 31, 2015, 259,673 restricted shares have been granted under the 2003 Stock Plan and 168,296 restricted shares have been granted under the 2014 Stock Plan. During 2015, 2014, and 2013, we granted 16,142, 13,824 and 18,942 restricted shares of common stock, to outside directors. The 2015 and 2014 grants were issued under the 2014 Stock Plan and the 2013 grants were issued under the 2003 Stock Plan. The grants are part of the compensation arrangement approved by the Compensation and Benefits Committee whereby 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. The fair value is determined by the closing price of the stock on the date of grant. 10-K Form During 2015, 2014, and 2013, we granted 71,699, 66,631 and 3,247 restricted shares of common stock to senior management under our Long Term Incentive Plan, or LTIP. The restricted shares granted under the LTIP for 2015 and 2014 of 71,699 and 66,631 shares, consisted of both time and performance-based awards. The 2015 and 2014 grants were issued under the 2014 Stock Plan and the 2013 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. 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 at the end of the three-year period. During the vesting period, the recipient receives dividends and has the right to vote the unvested shares granted, except for the 2015 and 2014 LTIP performance-based awards. 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 provisions are defined within the awards agreement. During 2013, additional restricted shares were granted on two occasions with different vesting periods. The restricted stock grants for 2013 of 3,247 shares vested fully on the second anniversary of the grant date. 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. 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. The average of the high and low prices of the stock on the grant date is used for senior management. During 2015, 2014 and 2013, we recognized compensation expense of $1.7 million, $0.9 million and $0.6 million and realized a tax benefit of $0.6 million, $0.3 million and $0.2 million related to restricted stock grants.
105 NOTE 22. 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:
Weighted Average Restricted Grant Date Stock Fair Value Non-vested at December 31, 2013 79,415 $ 21.50 Granted —— Vested 41,740 20.70 Forfeited 14,530 20.97 Non-vested at December 31, 2014 23,145 $ 23.28 Granted —— Vested 15,433 22.34 Forfeited 7,712 22.34 Non-vested at December 31, 2015 —$ —
The following table provides information about restricted stock granted under the 2014 Stock Plan for the years ended December 31:
Weighted Average Restricted Grant Date Stock Fair Value Non-vested at December 31, 2013 —$ — Granted 80,455 23.24 Vested 158 23.19 Forfeited 473 23.19 Non-vested at December 31, 2014 79,824 $ 23.24 Granted 87,841 28.71 Vested 14,126 23.57 Forfeited 3,183 26.15 Non-vested at December 31, 2015 150,356 $ 26.34
As of December 31, 2015, there was $2.3 million of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of 1.66 years.
Dividend Reinvestment Plan
We also sponsor a Dividend Reinvestment and Stock Purchase Plan, or Dividend Plan, where 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.
NOTE 23. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
The following condensed financial statements summarize the financial position of S&T Bancorp, Inc. as of December 31, 2015 and 2014 and the results of its operations and cash flows for each of the three years ended December 31, 2015, 2014 and 2013.
106 NOTE 23. PARENT COMPANY CONDENSED FINANCIAL INFORMATION -- continued
BALANCE SHEETS
December 31, (dollars in thousands) 2015 2014 ASSETS Cash $ 12,595 $ 38,028 Investments in: Bank subsidiary 777,795 565,927 Nonbank subsidiaries 20,624 20,569 Other assets 2,530 5,567 Total Assets $ 813,544 $ 630,091 LIABILITIES Long-term debt $ 20,619 $ 20,619 Other liabilities 688 1,083 Total Liabilities 21,307 21,702 Total Shareholders’ Equity 792,237 608,389 Total Liabilities and Shareholders’ Equity $ 813,544 $ 630,091
STATEMENTS OF NET INCOME
Years ended December 31, (dollars in thousands) 2015 2014 2013 Dividends from subsidiaries $ 75,413 $ 46,414 $ 24,087 Investment income 19 19 15 Interest expense on long-term debt 773 759 769 Other expenses 2,138 2,014 2,579 Income before Equity in Undistributed Net Income of Subsidiaries 72,521 43,660 20,754 Equity in undistributed net income (distribution in excess of net income) of: Bank subsidiary (5,064) 13,351 29,926 Nonbank subsidiaries (376) 899 (141)
Net Income $ 67,081 $ 57,910 $ 50,539 10-K Form
107 NOTE 23. PARENT COMPANY CONDENSED FINANCIAL INFORMATION -- continued
STATEMENTS OF CASH FLOWS
Years ended December 31, (dollars in thousands) 2015 2014 2013 OPERATING ACTIVITIES Net Income $ 67,081 $ 57,910 $ 50,539 Equity in undistributed (earnings) losses of subsidiaries 5,440 (14,250) (29,785) Tax benefit from stock-based compensation (53) (16) (96) Other 3,059 (106) 121 Net Cash Provided by Operating Activities 75,527 43,538 20,779 INVESTING ACTIVITIES Net investments in subsidiaries (38,404) — — Acquisitions (29,510) — — Net Cash Used in Investing Activities (67,914) — — FINANCING ACTIVITIES Repayment of junior subordinated debt (8,500) — — (Purchase) Sale of treasury shares, net (112) (163) (88) Cash dividends paid to common shareholders (24,487) (20,215) (18,137) Tax benefit from stock-based compensation 53 16 96 Net Cash Used in Financing Activities (33,046) (20,362) (18,129) Net increase (decrease) in cash (25,433) 23,176 2,650 Cash at beginning of year 38,028 14,852 12,202 Cash at End of Year $ 12,595 $ 38,028 $ 14,852
NOTE 24. 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 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 2015 and 2014. Tier 1 capital consists principally of shareholders’ equity, including preferred stock; excluding items recorded in accumulated other comprehensive 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 $25.0 million in junior subordinated debt which is included in Tier 2 capital for S&T in accordance with current regulatory reporting requirements. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of December 31, 2015 and 2014, we met all capital adequacy requirements to which we are subject.
108 NOTE 25. REGULATORY MATTERS -- continued
The following table summarizes risk-based capital amounts and ratios for S&T and S&T Bank:
To be Well Capitalized Minimum Under Prompt Regulatory Capital Corrective Action Actual Requirements Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2015 Leverage Ratio S&T $ 535,234 8.96% $ 238,841 4.00% $ 298,551 5.00% S&T Bank 502,114 8.43% 238,121 4.00% 297,651 5.00% Common Equity Tier 1 (to Risk-Weighted Assets) S&T 515,234 9.77% 237,315 4.50% 342,788 6.50% S&T Bank 502,114 9.55% 236,482 4.50% 341,584 6.50% Tier 1 Capital (to Risk-Weighted Assets) S&T 535,234 10.15% 316,419 6.00% 421,892 8.00% S&T Bank 502,114 9.55% 315,309 6.00% 420,412 8.00% Total Capital (to Risk-Weighted Assets) S&T 611,859 11.60% 421,892 8.00% 527,366 10.00% S&T Bank 577,824 11.00% 420,412 8.00% 525,515 10.00% As of December 31, 2014 Leverage Ratio(1) S&T $ 465,114 9.80% $ 189,895 4.00% $ 237,369 5.00% S&T Bank 403,593 8.53% 189,182 4.00% 236,477 5.00% Common Equity Tier 1 (to Risk-Weighted Assets) S&T 445,114 11.81% 169,621 4.50% 245,008 6.50% S&T Bank 403,593 10.76% 168,804 4.50% 243,827 6.50% Tier 1 Capital (to Risk-Weighted Assets)
S&T 465,114 12.34% 150,774 4.00% 226,161 6.00% 10-K Form S&T Bank 403,593 10.76% 150,048 4.00% 225,071 6.00% Total Capital (to Risk-Weighted Assets) S&T 537,935 14.27% 301,548 8.00% 376,936 10.00% S&T Bank 475,538 12.68% 300,095 8.00% 375,119 10.00%
NOTE 25. SEGMENTS
We operate three reportable operating segments: Community Banking, Insurance and Wealth Management. • Our Community Banking segment offers services which include accepting time and demand deposits and originating commercial and consumer loans. • Our Insurance segment includes a full-service insurance agency offering commercial property and casualty insurance, group life and health coverage, employee benefit solutions and personal insurance lines. • Our Wealth Management segment offers discount brokerage services, services as executor and trustee under wills and deeds, guardian and custodian of employee benefits and other trust and brokerage services, as well as a registered investment advisor that manages private investment accounts for individuals and institutions. The following represents total assets by reportable operating segment as of December 31:
(dollars in thousands) 2015 2014 Community Banking $ 6,305,046 $ 4,954,728 Insurance 9,619 7,468 Wealth Management 3,689 2,490 Total Assets $ 6,318,354 $ 4,964,686
109 NOTE 25. 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, 2015 Community Wealth (dollars in thousands) Banking Insurance Management Eliminations Consolidated Interest income $ 203,439 $ 2 $ 508 $ (401) $ 203,548 Interest expense 16,678 — — (681) 15,997 Net interest income 186,761 2 508 280 187,551 Provision for loan losses 10,388———10,388 Noninterest income 34,106 5,035 11,412 480 51,033 Noninterest expense 115,998 4,365 9,037 760 130,160 Depreciation expense 4,664 50 25 — 4,739 Amortization of intangible assets 1,738 50 30 — 1,818 Provision for income taxes 23,209 200 989 — 24,398 Net Income $ 64,870 $ 372 $ 1,839 $ — $ 67,081
For the Year Ended December 31, 2014 Community Wealth (dollars in thousands) Banking Insurance Management Eliminations Consolidated Interest income $ 160,403 $ 2 $ 518 $ (400) $ 160,523 Interest expense 13,989 — — (1,508) 12,481 Net interest income 146,414 2 518 1,108 148,042 Provision for loan losses 1,715———1,715 Noninterest income 29,443 5,279 11,297 319 46,338 Noninterest expense 97,733 4,313 9,173 1,427 112,646 Depreciation expense 3,387 51 27 — 3,465 Amortization of intangible assets 1,039 51 39 — 1,129 Provision for income taxes 16,311 303 901 — 17,515 Net Income $ 55,672 $ 563 $ 1,675 $ — $ 57,910
For the Year Ended December 31, 2013 Community Wealth (dollars in thousands) Banking Insurance Management Eliminations Consolidated Interest income $ 153,450 $ 2 $ 517 $ (213) $ 153,756 Interest expense 16,508 — — (1,945) 14,563 Net interest income 136,942 2 517 1,732 139,193 Provision for loan losses 8,311———8,311 Noninterest income 34,649 5,483 10,662 733 51,527 Noninterest expense 94,769 5,210 9,850 2,465 112,294 Depreciation expense 3,430 47 30 — 3,507 Amortization of intangible assets 1,492 51 48 — 1,591 Provision (benefit) for income taxes 14,180 (47) 345 — 14,478 Net Income $ 49,409 $ 224 $ 906 $ — $ 50,539
110 NOTE 26. SELECTED FINANCIAL DATA
The following table presents selected financial data for the most recent eight quarters.
2015 2014 (dollars in thousands, except per Fourth Third Second First Fourth Third Second First share data) (unaudited) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter SUMMARY OF OPERATIONS Interest income $ 53,353 $ 53,669 $ 52,611 $ 43,916 $ 41,381 $ 40,605 $ 39,872 $ 38,665 Interest expense 4,468 4,073 3,800 3,657 3,315 3,076 3,017 3,074 Provision for loan losses 3,915 3,206 2,059 1,207 1,106 1,454 (1,134) 289 Net Interest Income After Provision For Loan Losses 44,970 46,390 46,752 39,052 36,960 36,075 37,989 35,302 Security (losses) gains, net — — (34) — — — 40 1 Noninterest income 13,084 12,481 13,417 12,084 11,220 11,931 11,731 11,415 Noninterest expense 33,817 33,829 35,449 33,621 29,720 28,440 30,165 28,914 Income Before Taxes 24,237 25,042 24,686 17,515 18,460 19,566 19,595 17,804 Provision for income taxes 6,814 6,407 6,498 4,680 3,963 4,906 4,875 3,771 Net Income Available to Common Shareholders $ 17,423 $ 18,635 $ 18,188 $ 12,835 $ 14,497 $ 14,660 $ 14,720 $ 14,033 Per Share Data Common earnings per share—diluted $ 0.50 $ 0.54 $ 0.52 $ 0.41 $ 0.49 $ 0.49 $ 0.49 $ 0.47 Dividends declared per common share 0.19 0.18 0.18 0.18 0.18 0.17 0.17 0.16 Common book value 22.76 22.63 22.15 21.91 20.42 20.33 20.04 19.64
NOTE 27. 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 terminated 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 merchant card servicing business, we entered into a marketing and sales alliance agreement with the purchaser for an initial term of ten years. The agreement provides that we will actively market and refer our customers to the purchaser and in return will receive a share of the future revenue. Future revenue is dependent on the number of referrals, number of new merchant accounts and volume of 10-K Form activity.
111 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 subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (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 accompanying Management’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, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway 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, 2015 and 2014, 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, 2015, and our report dated February 22, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP Pittsburgh, Pennsylvania February 22, 2016
112 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, 2015 and 2014, and the related consolidated statements of net income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the period ended December 31, 2015. 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, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the period ended December 31, 2015, 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, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP Pittsburgh, Pennsylvania February 22, 2016 om10-K Form
113 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), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of December 31, 2015. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to S&T’s management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material respects, as of the end of the period covered by this Report. 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 S&T’s system of internal control over financial reporting as of December 31, 2015, in relation to criteria for effective internal control over financial reporting as described in “Internal Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concludes that, as of December 31, 2015, S&T’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated 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, 2015, which is included herein. c) Changes in Internal Control 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
114 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 May 18, 2016 annual meeting of shareholders.
Item 11. EXECUTIVE COMPENSATION
The 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 May 18, 2016 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 herein 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 May 18, 2016 annual meeting of shareholders.
EQUITY COMPENSATION PLAN INFORMATION UPDATE
The following table provides information as of December 31, 2015 related to the equity compensation plans in effect at that time.
(a) (b) (c) Number of securities to Weighted average Number of securities remaining be issued upon exercise price of available for future issuance exercise of outstanding outstanding under equity compensation plan options, warrants and options, warrants (excluding securities reflected in Plan category rights and rights column (a)) Equity compensation plan approved by shareholders(1) — $ — 581,704 Equity compensation plans not approved by shareholders —— — om10-K Form Total — $ — 581,704 (1) Awards granted under the 2003 and 2014 Incentive Stock 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 May 18, 2016 annual meeting of shareholders.
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 May 18, 2016 annual meeting of shareholders.
115 PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report.
Consolidated Financial Statements: The following consolidated financial statements are included in Part II, Item 8 of this Report. No financial statement schedules are being filed because the required information is inapplicable or is presented in the Consolidated Financial Statements or related notes.
Consolidated Balance Sheets 54 Consolidated Statements of Net Income 55 Consolidated Statements of Comprehensive Income 56 Consolidated Statements of Changes in Shareholders’ Equity 57 Consolidated Statements of Cash Flows 58 Notes to Consolidated Financial Statements 60 Report of KPMG LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting 112 Report of KPMG LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements 113
116 (b) Exhibits 2.1 Agreement and Plan of Merger, dated as of October 29, 2014, between S&T Bancorp, Inc. and Integrity Bancshares, Inc. Filed as Exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on October 30, 2014 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 herein 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. Filed as Exhibit 3.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on March 27, 2014 and incorporated herein by reference. 10.1 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.* 10.2 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.* om10-K Form 10.3 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.* 10.4 Severance Agreement, by and between Todd D. Brice and S&T Bancorp, Inc., dated April 7, 2015. Filed as Exhibit 10.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on April 10, 2015 and incorporated herein by reference.* 10.5 Severance Agreement, by and between David G. Antolik and S&T Bancorp, Inc. dated April 7, 2015. Filed as Exhibit 10.3 to S&T Bancorp, Inc. Current Report on Form 8-K filed on April 10, 2015 and incorporated herein by reference.* 10.6 Severance Agreement, by and between Mark Kochvar and S&T Bancorp, Inc. dated as of April 7, 2015. Filed as Exhibit 10.2 to S&T Bancorp, Inc. Current Report on Form 8-K filed on April 10, 2015 and incorporated herein by reference.* 10.7 Severance Agreement, by and between David Ruddock and S&T Bancorp, Inc. dated as of April 7, 2015. Filed as Exhibit 10.4 to S&T Bancorp, Inc. Current Report on Form 8-K filed on April 10, 2015 and incorporated herein by reference.* 10.8 Severance Agreement, by and between Patrick Haberfield and S&T Bancorp, Inc. dated as of April 7, 2015. Filed as Exhibit 10.5 to S&T Bancorp, Inc. Current Report on Form 8-K filed on April 10, 2015 and incorporated herein by reference.* 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.
117 (b) Exhibits 24 Power of Attorney. 31.1 Rule 13a-14(a) Certification of the Chief Executive Officer. 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. 101 The following financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 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, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. * Management Contract or Compensatory Plan or Arrangement
118 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
S&T BANCORP, INC. (Registrant)
2/22/2016 Todd D. Brice Date President and Chief Executive Officer (Principal Executive Officer)
2/22/2016 Mark Kochvar Date Senior Executive Vice President, Chief Financial Officer (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report 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
President and Chief Executive Officer (Principal Executive 2/22/2016 Officer)
Todd D. Brice
Senior Executive Vice President and Chief Financial Officer 2/22/2016 10-K Form (Principal Financial Officer)
Mark Kochvar
/s/ Melanie Lazzari Senior Vice President, Controller 2/22/2016 Melanie Lazzari
/s/ John J. Delaney Director 2/22/2016 John J. Delaney
/s/ Michael J. Donnelly Director 2/22/2016 Michael J. Donnelly
/s/ William J. Gatti Director 2/22/2016 William J. Gatti
Director 2/22/2016 James T. Gibson
119 SIGNATURE TITLE DATE
/s/ Jeffrey D. Grube Director 2/22/2016 Jeffrey D. Grube
/s/ Jerry D. Hostetter Director 2/22/2016 Jerry D. Hostetter
/s/ Frank W. Jones Director 2/22/2016 Frank W. Jones
/s/ David L. Krieger Director 2/22/2016 David L. Krieger
Director 2/22/2016 James C. Miller
/s/ Frank J. Palermo Director 2/22/2016 Frank J. Palermo
/s/ Christine J. Toretti Director 2/22/2016 Christine J. Toretti
/s/ Charles G. Urtin Chairman of the Board and Director 2/22/2016 Charles G. Urtin
/s/ Steven J. Weingarten Director Steven J. Weingarten 2/22/2016
*By: /s/ Frank W. Jones Director 2/22/2016 Frank W. Jones Attorney-in-fact
120 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT S&T Bancorp, Inc., a Pennsylvania corporation, is a financial holding company. The table below sets forth all of our subsidiaries as to state or jurisdiction of organization.
Subsidiary State or Jurisdiction of Organization
S&T Bank Pennsylvania
9th Street Holdings, Inc. Delaware
S&T Bancholdings, Inc. Delaware
S&T Insurance Group, LLC Pennsylvania
S&T Professional Resources Group, LLC Pennsylvania
S&T-Evergreen Insurance, LLC Pennsylvania
S&T Settlement Services, LLC Pennsylvania
Stewart Capital Advisors, LLC Pennsylvania
STBA Capital Trust I Delaware
Commonwealth Trust Credit Life Insurance Company Arizona om10-K Form Exhibit 23 Consent of Independent Registered Public Accounting Firm
The Board of Directors S&T Bancorp, Inc. and subsidiaries:
We consent to the incorporation by reference in the registration statement Nos. 333-207473, 333-157297 and 333-156555 on Form S-3 and Nos. 333-194083 and 333-156541 on Form S-8 of S&T Bancorp, Inc. and subsidiaries of our reports dated February 22, 2016 with respect to the consolidated balance sheets of S&T Bancorp, Inc. and subsidiaries as of December 31, 2015 and 2014, 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, 2015, and the effectiveness of internal control over financial reporting as of December 31, 2015, which reports appear in the December 31, 2015 annual report on Form 10-K of S&T Bancorp, Inc. and subsidiaries.
/s/ KPMG LLP Pittsburgh, Pennsylvania February 22, 2016 Exhibit 24 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below (each, a “Signatory”) constitutes and appoints Jeffrey D. Grube, Frank W. Jones and Frank J. Palermo, Jr. (each an “Agent,” and collectively, “Agents”) or any of them, his true and lawful attorney-in-fact and agent for and in his name, place and stead, in any and all capacities, to sign the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and to file the same, with all exhibits thereto, and all amendments or other documents in connection therewith, with the Securities and Exchange Commission. Each Signatory further grants to the Agent full power and authority to do and perform each and every act and thing requisite and necessary, in the judgment of such Agent, to be done in connection with any such signing and filing, as full to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all that said Agent may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which constitute but one and the same instrument.
Signature Title Date
/s. Charles G. Urtin Chairman of the Board and Director February 22, 2016 Charles G. Urtin
/s/ Todd D. Brice President and Chief Executive Officer and Director February 22, 2016 Todd D. Brice
/s/ John J. Delaney Director February 22, 2016 John J. Delaney
/s/ Michael J. Donnelly Director February 22, 2016 10-K Form Michael J. Donnelly
/s/ William J. Gatti Director February 22, 2016 William J. Gatti
Director February 22, 2016 James T. Gibson
/s/ Jeffrey D. Grube Director February 22, 2016 Jeffrey D. Grube
/s/ Jerry D. Hostetter Director February 22, 2016 Jerry D. Hostetter
/s/ Frank W. Jones Director February 22, 2016 Frank W. Jones
/s/ David L. Krieger Director February 22, 2016 David L. Krieger Signature Title Date Director February 22, 2016 James C. Miller
/s/ Frank J. Palermo, Jr. Director February 22, 2016 Frank J. Palermo, Jr.
/s/ Christine J. Toretti Director February 22, 2016 Christine J. Toretti
/s/ Steven J. Weingarten Director February 22, 2016 Steven J. Weingarten Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Todd D. Brice, certify that: 1. I have reviewed this Annual Report on Form 10-K of S&T Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and 10-K Form 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 22, 2016
/s/ Todd D. Brice Todd D. Brice, President and Chief Executive Officer Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark Kochvar, certify that: 1. I have reviewed this Annual Report on Form 10-K of S&T Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 22, 2016
/s/ Mark Kochvar Mark Kochvar, Senior Executive Vice President, Chief Financial Officer Exhibit 32 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER SARBANES-OXLEY ACT SECTION 906 Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the S&T Bancorp, Inc. (the “Company”) Annual Report on Form 10-K for the period ending December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd D. Brice, President and Chief Executive Officer of the Company, and I, Mark Kochvar, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and period covered by the report. This certificate is being made for the exclusive purpose of compliance by the Chief Executive Officer and Chief Financial Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law.
Date: February 22, 2016
/s/ Todd D. Brice /s/ Mark Kochvar Todd D. Brice, Mark Kochvar, President and Chief Executive Officer Senior Executive Vice President, Chief Financial Officer om10-K Form [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK]