S&T BANCORP INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐ 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 — (State or other jurisdiction of incorporation or organization)			25-1434426 — (IRS Employer Identification No.)
800 Philadelphia Street	Indiana	PA	15701
(Address of principal executive offices)			(zip code)

800 - 325-2265

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $2.50 par value	STBA	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $2.50 Par Value - 34,309,170 shares as of July 30, 2019

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S&T BANCORP, INC. AND SUBSIDIARIES

INDEX

S&T BANCORP, INC. AND SUBSIDIARIES

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets - June 30, 2019 and December 31, 2018	2
	Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2019 and 2018	3
	Consolidated Statements of Changes in Shareholders' Equity - Three and Six Months Ended June 30, 2019 and 2018	4
	Consolidated Statements of Cash Flows - Six Months Ended June 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	61
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	64
Item 5.	Other Information	64
Item 6.	Exhibits	64
	Signatures	65

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands, except per share data)	June 30, 2019 — (Unaudited)	(Audited)
ASSETS
Cash and due from banks, including interest-bearing deposits of $62,042 and $82,740 at June 30, 2019 and December 31, 2018	$ 122,876		$ 155,489
Securities, at fair value	668,588		684,872
Loans held for sale	8,135		2,371
Portfolio loans, net of unearned income	6,033,200		5,946,648
Allowance for loan losses	( 61,479	)	( 60,996	)
Portfolio loans, net	5,971,721		5,885,652
Bank owned life insurance	74,906		73,900
Premises and equipment, net	41,688		41,730
Federal Home Loan Bank and other restricted stock, at cost	22,491		29,435
Goodwill	287,446		287,446
Other intangible assets, net	2,255		2,601
Other assets	134,499		88,725
Total Assets	$ 7,334,605		$ 7,252,221
LIABILITIES
Deposits:
Noninterest-bearing demand	$ 1,462,386		$ 1,421,156
Interest-bearing demand	549,663		573,693
Money market	1,742,334		1,482,065
Savings	754,062		784,970
Certificates of deposit	1,348,255		1,412,038
Total Deposits	5,856,700		5,673,922
Securities sold under repurchase agreements	14,154		18,383
Short-term borrowings	295,000		470,000
Long-term borrowings	69,791		70,314
Junior subordinated debt securities	45,619		45,619
Other liabilities	88,388		38,222
Total Liabilities	6,369,652		6,316,460
SHAREHOLDERS’ EQUITY
Common stock ($2.50 par value) Authorized—50,000,000 shares Issued—36,130,480 shares at June 30, 2019 and at December 31, 2018 Outstanding— 34,330,338 shares at June 30, 2019 and 34,683,874 shares at December 31, 2018	90,326		90,326
Additional paid-in capital	211,325		210,345
Retained earnings	730,577		701,819
Accumulated other comprehensive loss	( 9,519	)	( 23,107	)
Treasury stock (1,800,142 shares at June 30, 2019 and 1,446,606 shares at December 31, 2018, at cost)	( 57,756	)	( 43,622	)
Total Shareholders’ Equity	964,953		935,761
Total Liabilities and Shareholders’ Equity	$ 7,334,605		$ 7,252,221

See Notes to Consolidated Financial Statements

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands, except per share data)	Three Months Ended June 30, — 2019	2018	Six Months Ended June 30, — 2019	2018
INTEREST AND DIVIDEND INCOME
Loans, including fees	$ 74,728	$ 66,610	$ 148,120	$ 129,665
Investment Securities:
Taxable	3,647	3,519	7,437	6,948
Tax-exempt	834	872	1,679	1,746
Dividends	415	580	978	1,251
Total Interest and Dividend Income	79,624	71,581	158,214	139,610
INTEREST EXPENSE
Deposits	16,055	9,166	31,036	17,012
Borrowings and junior subordinated debt securities	2,742	4,012	5,995	7,264
Total Interest Expense	18,797	13,178	37,031	24,276
NET INTEREST INCOME	60,827	58,403	121,183	115,334
Provision for loan losses	2,205	9,345	7,854	11,817
Net Interest Income After Provision for Loan Losses	58,622	49,058	113,329	103,517
NONINTEREST INCOME
Net gain on sale of securities	—	—	—	—
Debit and credit card	3,501	3,309	6,476	6,347
Service charges on deposit accounts	3,212	3,227	6,365	6,468
Wealth management	2,062	2,616	4,109	5,298
Mortgage banking	637	831	1,131	1,432
Gain on sale of a majority interest of insurance business	—	—	—	1,873
Other	3,489	2,268	6,182	4,626
Total Noninterest Income	12,901	12,251	24,263	26,044
NONINTEREST EXPENSE
Salaries and employee benefits	20,290	18,611	41,199	37,426
Data processing and information technology	3,414	2,379	6,646	4,704
Net occupancy	2,949	2,804	5,986	5,677
Furniture, equipment and software	2,301	2,134	4,531	4,090
Other taxes	1,456	1,739	2,641	3,587
Marketing	1,310	1,190	2,452	1,892
Professional services and legal	1,145	888	2,329	1,939
FDIC insurance	695	739	1,211	1,847
Merger related expenses	618	—	618	—
Other	6,174	5,379	11,658	10,783
Total Noninterest Expense	40,352	35,863	79,271	71,945
Income Before Taxes	31,171	25,446	58,321	57,616
Provision for income taxes	5,070	4,010	9,292	10,017
Net Income	$ 26,101	$ 21,436	$ 49,029	$ 47,599
Earnings per share—basic	$ 0.76	$ 0.62	$ 1.43	$ 1.37
Earnings per share—diluted	$ 0.76	$ 0.61	$ 1.43	$ 1.36
Dividends declared per share	$ 0.27	$ 0.25	$ 0.54	$ 0.47
Comprehensive Income	$ 33,513	$ 20,444	$ 62,617	$ 35,081

See Notes to Consolidated Financial Statements

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

(dollars in thousands, except share and per share data)	For the three months ended June 30, 2018 — Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive (Loss)/Income		Treasury Stock		Total
Balance at March 31, 2018	$ 90,326	$ 216,618	$ 649,925		$ ( 29,953	)	$ ( 31,509	)	$ 895,407
Net income for the three months ended June 30, 2018	—	—	21,436		—		—		21,436
Other comprehensive income (loss), net of tax	—	—	—		( 1,256	)	—		( 1,256	)
Reclassification of tax effects from the Tax Act (1)	—	—	( 264	)	264		—		—
Cash dividends declared ($0.25 per share)	—	—	( 8,722	)	—		—		( 8,722	)
Treasury stock issued for restricted awards (9,443 shares, net of no forfeitures)	—	—	( 263	)	—		264		1
Recognition of restricted stock compensation expense	—	267	—		—		—		267
Balance at June 30, 2018	$ 90,326	$ 216,885	$ 662,112		$ ( 30,945	)	$ ( 31,245	)	$ 907,133
	For the three months ended June 30, 2019
(dollars in thousands, except share and per share data)	Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive (Loss)/Income		Treasury Stock		Total
Balance at March 31, 2019	$ 90,326	$ 210,949	$ 716,078		$ ( 16,931	)	$ ( 57,266	)	$ 943,156
Net Income for the three months ended June 30, 2019	—	—	26,101		—		—		26,101
Other comprehensive income (loss), net of tax	—	—	—		7,412		—		7,412
Cash dividends declared ($0.27 per share)	—	—	( 9,242	)	—		—		( 9,242	)
Treasury stock issued for restricted stock awards (83,056 shares, net of forfeitures of 10,918 shares)	—	—	( 2,360	)	—		2,345		( 15	)
Repurchase of common stock (71,936 shares)	—	—	—		—		( 2,835	)	( 2,835	)
Recognition of restricted stock compensation expense	—	376	—		—		—		376
Balance at June 30, 2019	$ 90,326	$ 211,325	$ 730,577		$ ( 9,519	)	$ ( 57,756	)	$ 964,953

See Notes to Consolidated Financial Statements

(1) Reclassification due to the adoption of ASU No. 2018-02 related to funded status of pension.

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

(dollars in thousands, except share and per share data)	For the six months ended June 30, 2018 — Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive (Loss)/Income		Treasury Stock		Total
Balance at January 1, 2018	$ 90,326	$ 216,106	$ 628,107		$ ( 18,427	)	$ ( 32,081	)	$ 884,031
Net income for the six months ended June 30, 2018	—	—	47,599		—		—		47,599
Other comprehensive income (loss), net of tax	—	—	—		( 8,229	)	—		( 8,229	)
Reclassification of tax effects from the Tax Act (1)	—	—	3,427		( 3,427	)	—		—
Reclassification of net unrealized gains on equity securities (2)	—	—	862		( 862	)	—		—
Cash dividends declared ($0.47 per share)	—	—	( 16,391	)	—		—		( 16,391	)
Treasury stock issued for restricted awards (75,608 shares, net of 37,592 forfeitures)	—	—	( 1,492	)	—		836		( 656	)
Recognition of restricted stock compensation expense	—	779	—		—		—		779
Balance at June 30, 2018	$ 90,326	$ 216,885	$ 662,112		$ ( 30,945	)	$ ( 31,245	)	$ 907,133
	For the six months ended June 30, 2019
(dollars in thousands, except share and per share data)	Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive (Loss)/Income		Treasury Stock		Total
Balance at January 1, 2019	$ 90,326	$ 210,345	$ 701,819		$ ( 23,107	)	$ ( 43,622	)	$ 935,761
Net Income for the six months ended June 30, 2019	—	—	49,029		—		—		49,029
Other comprehensive income (loss), net of tax	—	—	—		13,588		—		13,588
Impact of new lease standard	—	—	167		—		—		167
Cash dividends declared ($0.54 per share)	—	—	( 18,559	)	—		—		( 18,559	)
Treasury stock issued for restricted stock awards (83,056 shares, net of forfeitures of 50,752 shares)	—	—	( 1,879	)	—		988		( 891	)
Repurchase of common stock (385,840 shares)	—	—	—		—		( 15,122	)	( 15,122	)
Recognition of restricted stock compensation expense	—	980	—		—		—		980
Balance at June 30, 2019	$ 90,326	$ 211,325	$ 730,577		$ ( 9,519	)	$ ( 57,756	)	$ 964,953

See Notes to Consolidated Financial Statements

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

(2) Reclassification due to the adoption of ASU No. 2016-01.

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S&T BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)	2019		2018
OPERATING ACTIVITIES
Net income	$ 49,029		$ 47,599
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	7,854		11,817
Net increase (decrease) in provision for unfunded loan commitments	208		( 114	)
Net depreciation, amortization and accretion	2,872		2,174
Net amortization of discounts and premiums on securities	1,562		1,572
Stock-based compensation expense	980		779
Gain on the sale of mortgage loans, net	( 683	)	( 683	)
Gain on the sale of majority interest of insurance business	—		( 1,873	)
Mortgage loans originated for sale	( 38,720	)	( 41,631	)
Proceeds from the sale of mortgage loans	33,639		42,998
Net change in:
Interest receivable	( 1,235	)	( 520	)
Interest payable	( 1,582	)	699
Other assets	( 11,006	)	( 853	)
Other liabilities	15,978		2,529
Net Cash Provided by Operating Activities	58,896		64,493
INVESTING ACTIVITIES
Purchases of securities	( 9,438	)	( 54,481	)
Proceeds from maturities, prepayments and calls of securities	40,260		45,487
Net proceeds from sales (purchases) of Federal Home Loan Bank stock	6,944		( 6,512	)
Net increase in loans	( 95,691	)	( 37,957	)
Proceeds from sale of loans not originated for resale	465		3,922
Purchases of premises and equipment	( 2,559	)	( 804	)
Proceeds from the sale of premises and equipment	9		110
Proceeds from the sale of majority interest of insurance business	—		4,540
Net Cash Used in Investing Activities	( 60,010	)	( 45,695	)
FINANCING ACTIVITIES
Net increase in core deposits	246,561		46,962
Net (decrease) in certificates of deposit	( 63,736	)	( 81,255	)
Net (decrease) in securities sold under repurchase agreements	( 4,229	)	( 5,437	)
Net (decrease) increase in short-term borrowings	( 175,000	)	60,000
Repayments on long-term borrowings	( 523	)	( 1,239	)
Treasury shares issued-net	( 891	)	( 657	)
Cash dividends paid to common shareholders	( 18,559	)	( 16,391	)
Repurchase of common stock	( 15,122	)	—
Net Cash (Used in) Provided by Financing Activities	( 31,499	)	1,983
Net (decrease) increase in cash and cash equivalents	( 32,613	)	20,781
Cash and cash equivalents at beginning of period	155,489		117,152
Cash and Cash Equivalents at End of Period	$ 122,876		$ 137,933
Supplemental Disclosures
Loans transferred to held for sale	$ —		$ 3,922
Leased right-of-use operating assets and lease liabilities added to the balance sheet	$ 37,263		$ —
Interest paid	$ 38,612		$ 23,576
Income taxes paid, net of refunds	$ 4,557		$ 11,103
Transfer net assets to investment in insurance company partnership	$ —		$ 1,917
Transfers of loans to other real estate owned	$ 215		$ 2,841

See Notes to Consolidated Financial Statements

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Principles of Consolidation

The interim Consolidated Financial Statements include the accounts of S&T Bancorp, Inc., or S&T, and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments of 20 percent to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting.

Basis of Presentation

The accompanying unaudited interim Consolidated Financial Statements of S&T have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 , filed with the Securities and Exchange Commission, or SEC, on February 21, 2019. In the opinion of management, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

On June 5, 2019, S&T and DNB Financial Corporation, or DNB, based in Downingtown, Pennsylvania with 14 branches in Chester, Delaware and Philadelphia counties and approximately $ 1.2 billion in assets as of March 31, 2019, entered into a definitive Agreement and Plan of Merger pursuant to which DNB will merge with and into S&T, with S&T continuing as the surviving entity. Under the terms of the Agreement and Plan of Merger, DNB shareholders will have the right to receive 1.22 shares of common stock, par value $ 2.50 per share, of S&T for each share of common stock, par value $ 1.00 per share, of DNB. Immediately following the merger of DNB and S&T, DNB’s wholly owned bank subsidiary, DNB First, National Association, will merge with and into S&T’s wholly owned bank subsidiary, S&T Bank, with S&T Bank as the surviving entity. The Agreement and Plan of Merger was unanimously approved by the Board of Directors of each of S&T and DNB. The transaction is expected to close in the fourth quarter of 2019, after satisfaction of customary closing conditions including regulatory approvals and approval of the shareholders of DNB.

On January 1, 2018, we sold a 70 percent majority interest in the assets of our wholly-owned subsidiary S&T Evergreen Insurance, LLC. We transferred our remaining 30 percent ownership interest in the net assets of S&T Evergreen Insurance, LLC to a new entity for a 30 percent ownership interest in a new insurance entity (see Note 15: Sale of a Majority Interest of Insurance Business). We use the equity method of accounting to recognize our partial ownership interest in the new entity.

Reclassification

A mounts in prior period financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no effect on our results of operations or financial condition.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Recently Adopted Accounting Standards Updates, or ASU or Update

Leases - Section A-Amendments to the FASB Accounting Standards Codification, Section B-Conforming Amendments Related to Leases and Section C-Background Information and Basis for Conclusions

In February 2016, the Financial Accounting Standards Board, or FASB, established ASC Topic 842, by issuing ASU No. 2016-02, which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use, or ROU, model that requires a lessee to recognize ROU assets and lease liabilities on the balance sheet. Leases will be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the statement of operations. We adopted the new standard on January 1,

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION - continued

2019 (see Note 7: Right-of-use Assets and Lease Liabilities).

The new standard provides several optional practical expedients to elect in transition to the new lease guidance. We have elected the "package of practical expedients," which permit us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the "use-of-hindsight" practical expedient which allows us to use hindsight in judgments that impact the lease term. We have also elected an accounting policy not to restate comparative periods upon adoption.

The most significant effects of adopting the new standard relate to the recognition of ROU assets and lease liabilities on our balance sheet for our real estate leases and providing significant new disclosures about our leasing activities. The carrying value of our ROU assets will be tested annually for impairment or more frequently if events or changes in circumstances indicate that an impairment might exist.

Upon adoption, we recognized additional finance lease liabilities of approximately $ 1.2 million and operating lease liabilities, net of deferred rent, of approximately $ 33.7 million based on the present value of the remaining minimum rental payments under current leasing standards for existing leases. We also recognized corresponding finance ROU assets of $ 1.2 million and operating ROU assets of approximately $ 33.4 million . The adoption had no material impact on the Consolidated Statements of Comprehensive Income.

The new standard also provides practical expedients for our ongoing lease accounting. We elected the short-term lease recognition exemption for all leases with terms of 12 months or less. This means that we will not recognize ROU assets or lease liabilities for existing short-term leases of those assets in transition. Beginning in 2019, we made changes to our disclosed lease recognition policies and practices, as well as to other related financial statement disclosures due to the adoption of this standard (See Note 7: Right-of-use Assets and Lease Liabilities).

Leases - Land Easement Practical Expedient for Transition to Topic 842

In January 2018, the FASB issued ASU No. 2018-01, Leases - Land Easement Practical Expedient for Transition to Topic 842. The amendments in this ASU permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that existed or expired before the entity's adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. We have one land easement lease that we previously accounted for under Topic 840; as such, this lease has been recognized as an operating lease under Topic 842. We adopted the amendments in this ASU in conjunction with the adoption of the new lease standard, ASU 2016-02.

Accounting Standards Issued But Not Yet Adopted

Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU apply to an entity that is a customer in a hosting arrangement that is a service contract. These amendments relate to accounting for implementation costs ( e.g ., implementation, setup and other upfront costs.) These amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which costs to capitalize and which costs to expense. These amendments require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This ASU is effective for annual and interim periods beginning after December 15, 2019. Early adoption of the amendments is permitted, including adoption in any interim period. We are evaluating the amendments in this ASU; however, we do not anticipate that these amendments will materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION - continued

Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU apply to all employers that sponsor defined benefit pension or other postretirement plans. These amendments remove certain disclosures from Topic 715-20 and require additional disclosures. The amendments in this ASU will require S&T to update our employee benefits disclosures beginning with our Form 10-Q for the period ended March 31, 2021. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.

Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove certain disclosures from Topic 820, modify disclosures and/or require additional disclosures. The amendments in this Update will require us to change our Fair Value disclosures beginning with our Form 10-Q for the period ended March 31, 2020. The amendments in this ASU will have no impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.

Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step two from the goodwill impairment test. The amendments are expected to reduce the complexity and costs associated with performing the goodwill impairment test, which could result in recording impairment charges sooner than under the current guidance. This Update is effective for any interim and annual impairment tests in reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in this ASU is not expected to have any impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive Income.

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments of this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The collective changes to the recognition and measurement accounting standards for financial instruments and their anticipated impact on the allowance for credit losses modeling have been universally referred to as CECL, or current expected credit loss, model. This Update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We did not adopt this ASU at its early adoption date.

We have created a CECL Committee to govern the implementation of these amendments consisting of key stakeholders from Credit Administration, Finance, Accounting, Risk Management and Internal Audit. We have engaged a third-party to assist us in developing our CECL methodology. We have made our decision on loan segmentation and currently are in the process of testing and validating two methodologies for calculating the quantitative component of our CECL allowance. Our next steps include developing the qualitative allowance framework, and designing internal controls and financial statement disclosures. We continue to evaluate the provisions of this ASU to determine the potential impact on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income.

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NOTE 2. EARNINGS PER SHARE

Diluted earnings per share is calculated using both the two-class and the treasury stock methods with the more dilutive method used to determine diluted earnings per share. The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented.

(in thousands, except share and per share data)	Three Months Ended June 30, — 2019	2018	Six Months Ended June 30, — 2019	2018
Numerator for Earnings per Share—Basic:
Net income	$ 26,101	$ 21,436	$ 49,029	$ 47,599
Less: Income allocated to participating shares	71	62	137	141
Net Income Allocated to Shareholders	$ 26,029	$ 21,374	$ 48,892	$ 47,458
Numerator for Earnings per Share—Diluted:
Net income	$ 26,101	$ 21,436	$ 49,029	$ 47,599
Net Income Available to Shareholders	$ 26,101	$ 21,436	$ 49,029	$ 47,599
Denominators for Earnings per Share:
Weighted Average Shares Outstanding—Basic	34,158,136	34,793,160	34,298,185	34,775,043
Add: Potentially dilutive shares	52,850	264,416	88,121	267,998
Denominator for Treasury Stock Method—Diluted	34,210,986	35,057,576	34,386,306	35,043,041
Weighted Average Shares Outstanding—Basic	34,158,136	34,793,160	34,298,185	34,775,043
Add: Average participating shares outstanding	93,433	100,212	96,261	103,449
Denominator for Two-Class Method—Diluted	34,251,569	34,893,372	34,394,446	34,878,492
Earnings per share—basic	$ 0.76	$ 0.62	$ 1.43	$ 1.37
Earnings per share—diluted	$ 0.76	$ 0.61	$ 1.43	$ 1.36
Restricted stock considered anti-dilutive excluded from potentially dilutive shares	5,183	—	44,153	2,047

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NOTE 3. FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

Recurring Basis

Debt Securities Available-for-Sale

We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing services which provide us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market valuation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, and extensive quality control programs.

Equity Securities

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

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Deferred Compensation Plan Assets

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

Derivative Financial Instruments

We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2. We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparties’ nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings.

Nonrecurring Basis

Loans Held for Sale

Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3.

Impaired Loans

Impaired loans are carried at the lower of carrying value or fair value. Fair value is determined as the recorded investment balance less any specific reserve. We establish specific reserves based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3.

OREO and Other Repossessed Assets

OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value are classified as Level 3.

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NOTE 3. FAIR VALUE MEASUREMENTS – continued

Mortgage Servicing Rights

The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into mortgage banking income in the Consolidated Statements of Comprehensive Income.

Other Assets

We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.

Financial Instruments

In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and a willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.

Cash and Cash Equivalents

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

Loans

The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.

Bank Owned Life Insurance

Fair value approximates net cash surrender value of bank owned life insurance, or BOLI.

Federal Home Loan Bank, or FHLB, and Other Restricted Stock

It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value.

Deposits

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

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NOTE 3. FAIR VALUE MEASUREMENTS – continued

Short-Term Borrowings

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

Long-Term Borrowings

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

Junior Subordinated Debt Securities

The interest rate on the variable rate junior subordinated debt securities is reset quarterly; therefore, the carrying values approximate their fair values.

Loan Commitments and Standby Letters of Credit

Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

Other

Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations.

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NOTE 3. FAIR VALUE MEASUREMENTS – continued

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at June 30, 2019 and December 31, 2018 . There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.

(dollars in thousands)	June 30, 2019 — Level 1	Level 2	Level 3	Total
ASSETS
Debt securities available-for-sale:
U.S. Treasury securities	$ —	$ 10,007	$ —	$ 10,007
Obligations of U.S. government corporations and agencies	—	129,773	—	129,773
Collateralized mortgage obligations of U.S. government corporations and agencies	—	150,405	—	150,405
Residential mortgage-backed securities of U.S. government corporations and agencies	—	20,936	—	20,936
Commercial mortgage-backed securities of U.S. government corporations and agencies	—	235,292	—	235,292
Obligations of states and political subdivisions	—	117,624	—	117,624
Total Debt Securities Available-for-Sale	—	664,037	—	664,037
Marketable equity securities	—	4,551	—	4,551
Total Securities	—	668,588	—	668,588
Securities held in a deferred compensation plan	5,532	—	—	5,532
Derivative financial assets:
Interest rate swaps	—	22,688	—	22,688
Interest rate lock commitments	—	649	—	649
Total Assets	$ 5,532	$ 691,925	$ —	$ 697,457
LIABILITIES
Derivative financial liabilities:
Interest rate swaps	$ —	$ 22,620	$ —	$ 22,620
Forward sale contracts	—	105	—	105
Total Liabilities	$ —	$ 22,725	$ —	$ 22,725

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NOTE 3. FAIR VALUE MEASUREMENTS – continued

(dollars in thousands)	December 31, 2018 — Level 1	Level 2	Level 3	Total
ASSETS
Debt securities available-for-sale:
U.S. Treasury securities	$ —	$ 9,736	$ —	$ 9,736
Obligations of U.S. government corporations and agencies	—	128,261	—	128,261
Collateralized mortgage obligations of U.S. government corporations and agencies	—	148,659	—	148,659
Residential mortgage-backed securities of U.S. government corporations and agencies	—	24,350	—	24,350
Commercial mortgage-backed securities of U.S. government corporations and agencies	—	246,784	—	246,784
Obligations of states and political subdivisions	—	122,266	—	122,266
Total Debt Securities Available-for-Sale	—	680,056	—	680,056
Marketable equity securities	—	4,816	—	4,816
Total Securities	—	684,872	—	684,872
Securities held in a deferred compensation plan	4,725	—	—	4,725
Derivative financial assets:
Interest rate swaps	—	5,504	—	5,504
Interest rate lock commitments	—	251	—	251
Forward sale contracts	—	55	—	55
Total Assets	$ 4,725	$ 690,682	$ —	$ 695,407
LIABILITIES
Derivative financial liabilities:
Interest rate swaps	$ —	$ 5,340	$ —	$ 5,340
Total Liabilities	$ —	$ 5,340	$ —	$ 5,340

Assets Recorded at Fair Value on a Nonrecurring Basis

We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either June 30, 2019 or December 31, 2018 .

The following table presents our assets that are measured at fair value on a nonrecurring basis by the fair value hierarchy level as of the dates presented:

(dollars in thousands)	June 30, 2019 — Level 1	Level 2	Level 3	Total	December 31, 2018 — Level 1	Level 2	Level 3	Total
ASSETS (1)
Impaired loans	$ —	$ —	$ 30,456	$ 30,456	$ —	$ —	$ 21,441	$ 21,441
Other real estate owned	—	—	1,353	1,353	—	—	2,826	2,826
Mortgage servicing rights	—	—	1,141	1,141	—	—	1,197	1,197
Total Assets	$ —	$ —	$ 32,950	$ 32,950	$ —	$ —	$ 25,464	$ 25,464
(1) This table presents only the nonrecurring items that are recorded at fair value in our financial statements.

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NOTE 3. FAIR VALUE MEASUREMENTS – continued

The carrying values and fair values of our financial instruments at June 30, 2019 and December 31, 2018 are presented in the following tables:

(dollars in thousands)	Carrying Value (1)	Fair Value Measurements at June 30, 2019 — Total	Level 1	Level 2	Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits	$ 122,876	$ 122,876	$ 122,876	$ —	$ —
Securities	668,588	668,588	—	668,588	—
Loans held for sale	8,135	8,135	—	—	8,135
Portfolio loans, net	5,971,721	5,836,651	—	—	5,836,651
Bank owned life insurance	74,906	74,906	—	74,906	—
FHLB and other restricted stock	22,491	22,491	—	—	22,491
Securities held in a deferred compensation plan	5,532	5,532	5,532	—	—
Mortgage servicing rights	4,214	4,728	—	—	4,728
Interest rate swaps	22,688	22,688	—	22,688	—
Interest rate lock commitments	649	649	—	649	—
LIABILITIES
Deposits	$ 5,856,700	$ 5,854,053	$ 4,508,445	$ 1,345,608	$ —
Securities sold under repurchase agreements	14,154	14,154	14,154	—	—
Short-term borrowings	295,000	295,000	295,000	—	—
Long-term borrowings	69,791	70,405	39,334	31,071	—
Junior subordinated debt securities	45,619	45,619	45,619	—	—
Interest rate swaps	22,620	22,620	—	22,620	—
Forward sales contracts	105	105	—	105	—
(1) As reported in the Consolidated Balance Sheets

(dollars in thousands)	Carrying Value (1)	Fair Value Measurements at December 31, 2018 — Total	Level 1	Level 2	Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits	$ 155,489	$ 155,489	$ 155,489	$ —	$ —
Securities	684,872	684,872	—	684,872	—
Loans held for sale	2,371	2,469	—	—	2,469
Portfolio loans, net	5,885,652	5,728,843	—	—	5,728,843
Bank owned life insurance	73,900	73,900	—	73,900	—
FHLB and other restricted stock	29,435	29,435	—	—	29,435
Securities held in a Deferred Compensation Plan	4,725	4,725	4,725	—	—
Mortgage servicing rights	4,464	5,181	—	—	5,181
Interest rate swaps	5,504	5,504	—	5,504	—
Interest rate lock commitments	251	251	—	251	—
Forward sale contracts	55	55	—	55	—
LIABILITIES
Deposits	$ 5,673,922	$ 5,662,193	$ 4,261,884	$ 1,400,309	$ —
Securities sold under repurchase agreements	18,383	18,383	18,383	—	—
Short-term borrowings	470,000	470,000	470,000	—	—
Long-term borrowings	70,314	70,578	38,610	31,968	—
Junior subordinated debt securities	45,619	45,619	45,619	—	—
Interest rate swaps	5,340	5,340	—	5,340	—
(1) As reported in the Consolidated Balance Sheets

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NOTE 4. SECURITIES

The following table presents the fair values of our securities portfolio at the dates presented:

(dollars in thousands) — Debt securities available-for-sale	$ 664,037	$ 680,056
Marketable equity securities	4,551	4,816
Total Securities	$ 668,588	$ 684,872

Debt Securities Available-for-Sale

The following tables present the amortized cost and fair value of debt securities available-for-sale as of the dates presented:

(dollars in thousands)	June 30, 2019 — Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$ 9,964	$ 43	$ —		$ 10,007	$ 9,958	$ —	$ ( 222	)	$ 9,736
Obligations of U.S. government corporations and agencies	128,260	1,532	( 19	)	129,773	129,267	68	( 1,074	)	128,261
Collateralized mortgage obligations of U.S. government corporations and agencies	147,692	3,029	( 316	)	150,405	149,849	795	( 1,985	)	148,659
Residential mortgage-backed securities of U.S. government corporations and agencies	20,704	289	( 57	)	20,936	24,564	203	( 417	)	24,350
Commercial mortgage-backed securities of U.S. government corporations and agencies	232,657	2,807	( 172	)	235,292	251,660	—	( 4,876	)	246,784
Obligations of states and political subdivisions	113,508	4,116	—		117,624	119,872	2,448	( 54	)	122,266
Total Debt Securities Available-for-Sale	$ 652,785	$ 11,816	$ ( 564	)	$ 664,037	$ 685,170	$ 3,514	$ ( 8,628	)	$ 680,056

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

	June 30, 2019
	Less Than 12 Months				12 Months or More				Total
(dollars in thousands)	Number of Securities	Fair Value	Unrealized Losses		Number of Securities	Fair Value	Unrealized Losses		Number of Securities	Fair Value	Unrealized Losses
U.S. Treasury securities	—	$ —	$ —		—	$ —	$ —		—	$ —	$ —
Obligations of U.S. government corporations and agencies	—	—	—		3	24,932	( 19	)	3	24,932	( 19	)
Collateralized mortgage obligations of U.S. government corporations and agencies	1	3,613	( 6	)	8	41,602	( 310	)	9	45,215	( 316	)
Residential mortgage-backed securities of U.S. government corporations and agencies	—	—	—		2	6,740	( 57	)	2	6,740	( 57	)
Commercial mortgage-backed securities of U.S. government corporations and agencies	—	—	—		5	48,119	( 172	)	5	48,119	( 172	)
Obligations of states and political subdivisions	—	—	—		—	—	—		—	—	—
Total Temporarily Impaired Debt Securities	1	$ 3,613	$ ( 6	)	18	$ 121,393	$ ( 558	)	19	$ 125,006	$ ( 564	)

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NOTE 4. SECURITIES – continued

	December 31, 2018
	Less Than 12 Months				12 Months or More				Total
(dollars in thousands)	Number of Securities	Fair Value	Unrealized Losses		Number of Securities	Fair Value	Unrealized Losses		Number of Securities	Fair Value	Unrealized Losses
U.S. Treasury securities	—	$ —	$ —		1	$ 9,736	$ ( 222	)	1	$ 9,736	$ ( 222	)
Obligations of U.S. government corporations and agencies	7	67,649	( 613	)	6	35,760	( 461	)	13	103,409	( 1,074	)
Collateralized mortgage obligations of U.S. government corporations and agencies	2	12,495	( 44	)	14	76,179	( 1,941	)	16	88,674	( 1,985	)
Residential mortgage-backed securities of U.S. government corporations and agencies	2	2,327	( 45	)	3	9,241	( 372	)	5	11,568	( 417	)
Commercial mortgage-backed securities of U.S. government corporations and agencies	8	75,466	( 1,032	)	19	171,318	( 3,844	)	27	246,784	( 4,876	)
Obligations of states and political subdivisions	2	9,902	( 23	)	1	5,247	( 31	)	3	15,149	( 54	)
Total Temporarily Impaired Debt Securities	21	$ 167,839	$ ( 1,757	)	44	$ 307,481	$ ( 6,871	)	65	$ 475,320	$ ( 8,628	)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. SECURITIES – continued

The following table presents net unrealized gains and losses, net of tax, on debt securities available-for-sale included in accumulated other comprehensive income/(loss), for the periods presented:

(dollars in thousands)	June 30, 2019 — Gross Unrealized Gains		Gross Unrealized Losses		Net Unrealized (Losses)/Gains		December 31, 2018 — Gross Unrealized Gains		Gross Unrealized Losses		Net Unrealized Gains/(Losses)
Total unrealized gains/(losses) on debt securities available-for-sale	$ 11,816		$ ( 564	)	$ 11,252		$ 3,514		$ ( 8,628	)	$ ( 5,114	)
Income tax (expense) benefit	( 2,520	)	120		( 2,400	)	( 746	)	1,832		1,086
Net Unrealized Gains/(Losses), Net of Tax Included in Accumulated Other Comprehensive Income/(Loss)	$ 9,296		$ ( 444	)	$ 8,852		$ 2,768		$ ( 6,796	)	$ ( 4,028	)

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

(dollars in thousands)	June 30, 2019 — Amortized Cost	Fair Value
Obligations of the U.S. Treasury, U.S. government corporations and agencies, and obligations of states and political subdivisions
Due in one year or less	$ 47,630	$ 47,770
Due after one year through five years	122,824	124,741
Due after five years through ten years	63,472	66,144
Due after ten years	17,805	18,750
Debt Securities Available-for-Sale With Maturities	251,731	257,405
Collateralized mortgage obligations of U.S. government corporations and agencies	147,692	150,405
Residential mortgage-backed securities of U.S. government corporations and agencies	20,705	20,936
Commercial mortgage-backed securities of U.S. government corporations and agencies	232,657	235,291
Total Debt Securities Available-for-Sale	$ 652,785	$ 664,037

Debt securities with carrying values of $ 201.2 million at June 30, 2019 and $ 236.0 million at December 31, 2018 were pledged for various regulatory and legal requirements.

Marketable Equity Securities

The following table presents realized and unrealized net gains and losses for our marketable equity securities for the periods presented:

(dollars in thousands)	Three Months Ended June 30, — 2019	2018	Six Months Ended June 30, — 2019		2018
Marketable Equity Securities
Net market (losses)/gains recognized	$ 52	$ 230	$ ( 266	)	$ 282
Less: Net gains recognized for equity securities sold	—	—	—		—
Unrealized (Losses)/Gains on Equity Securities Still Held	$ 52	$ 230	$ ( 266	)	$ 282

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE

Loans are presented net of unearned income of $ 5.3 million at June 30, 2019 and December 31, 2018 . The following table indicates the composition of loans as of the dates presented:

(dollars in thousands)	June 30, 2019	December 31, 2018
Commercial
Commercial real estate	$ 2,906,895	$ 2,921,832
Commercial and industrial	1,559,727	1,493,416
Commercial construction	267,203	257,197
Total Commercial Loans	4,733,825	4,672,445
Consumer
Residential mortgage	751,355	726,679
Home equity	464,195	471,562
Installment and other consumer	72,041	67,546
Consumer construction	11,784	8,416
Total Consumer Loans	1,299,375	1,274,203
Total Portfolio Loans	6,033,200	5,946,648
Loans held for sale	8,135	2,371
Total Loans	$ 6,041,335	$ 5,949,019

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by reviewing the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments. Total commercial loans represented 78.5 percent of total portfolio loans at June 30, 2019 and 78.6 percent at December 31, 2018 . Within our commercial portfolio, the Commercial Real Estate, or CRE, and Commercial Construction portfolios combined comprised $ 3.2 billion or 67 percent of total commercial loans at June 30, 2019 and $ 3.2 billion or 68 percent of total commercial loans at December 31, 2018 and 53 percent of total portfolio loans at both June 30, 2019 and December 31, 2018 . Further segmentation of the CRE and Commercial Construction portfolios by collateral type reveals no concentration in excess of 14 percent of both total CRE and Commercial Construction loans at both June 30, 2019 and December 31, 2018 .

We lend primarily in Pennsylvania and the contiguous states of Ohio, New York, West Virginia and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this geography, resulting in a concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data and information supplied by our customers. We also use subscription services for additional geographic and industry specific information. Our CRE and Commercial Construction portfolios have exposure outside of this geography of 6.4 percent of the combined portfolios and 3.4 percent of total portfolio loans at June 30, 2019 . This compares to 5.4 percent of the combined portfolios and 2.9 percent of total portfolio loans at December 31, 2018 .

We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, and all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan, to determine if they should be designated as troubled debt restructurings, or TDRs.

All TDRs are considered to be impaired loans and will be reported as impaired loans for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be collected according to the restructured agreement. Further, all impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements to be returned to accruing status. TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

The following table summarizes restructured loans as of the dates presented:

(dollars in thousands)	June 30, 2019 — Performing TDRs	Nonperforming TDRs	Total TDRs	December 31, 2018 — Performing TDRs	Nonperforming TDRs	Total TDRs
Commercial real estate	$ 3,519	$ 5,600	$ 9,119	$ 2,054	$ 1,139	$ 3,193
Commercial and industrial	9,671	980	10,651	7,026	6,646	13,672
Commercial construction	1,913	406	2,319	1,912	406	2,318
Residential mortgage	1,997	1,497	3,494	2,214	1,543	3,757
Home equity	3,577	1,458	5,035	3,568	1,349	4,917
Installment and other consumer	13	3	16	12	5	17
Total	$ 20,690	$ 9,944	$ 30,634	$ 16,786	$ 11,088	$ 27,874

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

The following tables present the restructured loans by loan segment and by type of concession for the three and six months ended June 30, 2019 and 2018:

(dollars in thousands)	Three Months Ended June 30, 2019 — Number of Loans	Pre-Modification Outstanding Recorded Investment (1)	Post-Modification Outstanding Recorded Investment (1)	Total Difference in Recorded Investment		Three Months Ended June 30, 2018 — Number of Loans	Pre-Modification Outstanding Recorded Investment ( 1)	Post-Modification Outstanding Recorded Investment (1)	Total Difference in Recorded Investment
Totals by Loan Segment
Commercial Real Estate
Maturity date extension	1	$ 1,322	$ 1,311	$ ( 11	)	—	$ —	$ —	$ —
Maturity date extension and interest rate reduction	1	151	148	( 3	)	—	—	—	—
Principal forgiveness	1	4,690	4,631	( 59	)	—	—	—	—
Total Commercial Real Estate	3	6,163	6,090	( 73	)	—	—	—	—
Commercial and Industrial
Principal deferral	—	—	—	—		3	4,815	5,034	219
Total Commercial and Industrial	—	—	—	—		3	4,815	5,034	219
Residential Mortgage
Chapter 7 bankruptcy (2)	2	116	115	( 1	)	1	41	41	—
Total Residential Mortgage	2	116	115	( 1	)	1	41	41	—
Home equity
Chapter 7 bankruptcy (2)	6	107	105	( 2	)	2	26	26	—
Interest rate reduction	1	109	108	( 1	)	—	—	—	—
Maturity date extension and interest rate reduction	—	—	—	—		2	47	47	—
Total Home Equity	7	216	214	( 3	)	4	73	73	—
Installment and Other Consumer
Chapter 7 bankruptcy (2)	2	9	9	—		2	8	7	( 1	)
Total Installment and Other Consumer	2	$ 9	$ 9	$ —		2	$ 8	$ 7	$ ( 1	)
Totals by Concession Type
Maturity date extension	1	$ 1,322	$ 1,311	$ ( 11	)	—	$ —	$ —	$ —
Chapter 7 bankruptcy (2)	10	232	229	( 3	)	5	75	74	( 1	)
Maturity date extension and interest rate reduction	1	151	148	( 3	)	2	47	47	—
Principal deferral	—	—	—	—		3	4,815	5,034	219
Interest rate reduction	1	109	108	—		—	—	—	—
Principal forgiveness	1	4,690	4,631	( 59	)	—	—	—	—
Total	14	$ 6,504	$ 6,427	$ ( 76	)	10	$ 4,937	$ 5,155	$ 218
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end. (2) Chapter 7 bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

(dollars in thousands)	Six Months Ended June 30, 2019 — Number of Loans	Pre-Modification Outstanding Recorded Investment (1)	Post-Modification Outstanding Recorded Investment (1)	Total Difference in Recorded Investment		Six Months Ended June 30, 2018 — Number of Loans	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)	Post-Modification Outstanding Recorded Investment (1)
Totals by Loan Segment
Commercial real estate
Maturity date extension	1	$ 1,322	$ 1,311	$ ( 11	)	—	$ —	$ —	$ —
Maturity date extension and interest rate reduction	1	151	148	( 3	)	—	—	—	—
Principal forgiveness	1	4,690	4,631	( 59	)	—	—	—	—
Total Commercial Real Estate	3	6,163	6,090	( 73	)	—	—	—	—
Commercial and Industrial
Maturity date extension	—	—	—	—		2	768	582	( 186	)
Maturity date extension and interest rate reduction	1	4,751	4,529	( 222	)	—	—	—	—
Principal deferral	—	—	—	—		3	4,815	5,034	219
Principal deferral and Maturity date extension	—	—	—	—		6	5,355	5,229	( 126	)
Total Commercial and Industrial	1	4,751	4,529	( 222	)	11	10,938	10,845	( 93	)
Residential Mortgage
Chapter 7 bankruptcy (2)	3	166	163	( 3	)	3	199	196	( 3	)
Total Residential Mortgage	3	166	163	( 3	)	3	199	196	( 3	)
Home equity
Chapter 7 bankruptcy (2)	13	298	268	( 30	)	11	605	574	( 31	)
Interest rate reduction	2	190	189	( 1	)	—	—	—	—
Maturity date extension and interest rate reduction	—	—	—	—		2	47	47	—
Total Home Equity	15	488	457	( 31	)	13	652	621	( 31	)
Installment and Other Consumer
Chapter 7 bankruptcy (2)	3	9	9	—		4	25	23	( 2	)
Total Installment and Other Consumer	3	$ 9	$ 9	$ —		4	25	$ 23	$ ( 2	)
Totals by Concession Type
Maturity date extension	1	1,322	1,311	( 11	)	2	768	582	( 186	)
Maturity date extension and interest rate reduction	2	4,902	4,677	( 225	)	2	47	47	—
Principal deferral	—	—	—	—		3	4,815	5,034	219
Principal deferral and Maturity date extension	—	—	—	—		6	5,355	5,229	( 126	)
Chapter 7 bankruptcy (2)	19	473	440	( 33	)	18	829	793	( 36	)
Interest rate reduction	2	190	189	—		—	—	—	—
Principal forgiveness	1	4,690	4,631	( 59	)	—	—	4,690	4,690
Total	25	$ 11,577	$ 11,248	$ ( 328	)	31	$ 11,814	$ 16,375	$ 4,561
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end. (2) Chapter 7 bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. LOANS AND LOANS HELD FOR SALE - continued

As of June 30, 2019 , we had 8 commitments to lend an additional $ 10.8 million on TDRs. Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place. There were no TDRs that defaulted during the three and six months ended June 30, 2019 and 2018 that were restructured within the last 12 months prior to defaulting.

The following table is a summary of nonperforming assets as of the dates presented:

(dollars in thousands)	June 30, 2019	December 31, 2018
Nonperforming Assets
Nonaccrual loans	$ 35,083	$ 34,985
Nonaccrual TDRs	9,944	11,088
Total Nonaccrual Loans	45,027	46,073
OREO	1,495	3,092
Total Nonperforming Assets	$ 46,522	$ 49,165

NOTE 6. ALLOWANCE FOR LOAN LOSSES

We maintain an allowance for loan losses, or ALL, at a level determined to be adequate to absorb estimated probable credit losses inherent within the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) Commercial Real Estate, or CRE, 2) Commercial and Industrial, or C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.

The following are key risks within each portfolio segment:

CRE —Loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Operations of the individual projects and global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type and the business prospects of the lessee, if the project is not owner-occupied.

C&I —Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

Commercial Construction —Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

Consumer Real Estate —Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

Other Consumer —Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines of credit. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and loan to value, or LTV, for Consumer Real Estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment.

The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from the point at which a loss is incurred on a loan to the point at which the loss is confirmed. Another key assumption is the look-back period which represents the historical data period utilized to calculate loss rates.

Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis.

The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented:

(dollars in thousands)	June 30, 2019 — Current	30-59 Days Past Due	60-89 Days Past Due	Non - performing	Total Past Due Loans	Total Loans
Commercial real estate	$ 2,875,439	$ 1,456	$ 1,217	$ 28,783	$ 31,456	$ 2,906,895
Commercial and industrial	1,554,081	606	910	4,130	5,646	1,559,727
Commercial construction	265,977	—	—	1,226	1,226	267,203
Residential mortgage	741,453	1,900	1,220	6,782	9,902	751,355
Home equity	457,296	2,555	264	4,081	6,900	464,195
Installment and other consumer	71,808	126	81	25	232	72,041
Consumer construction	11,784	—	—	—	—	11,784
Loans held for sale	8,135	—	—	—	—	8,135
Total	$ 5,985,973	$ 6,643	$ 3,692	$ 45,027	$ 55,362	$ 6,041,335

(dollars in thousands)	December 31, 2018 — Current	30-59 Days Past Due	60-89 Days Past Due	Non - performing	Total Past Due Loans	Total Loans
Commercial real estate	$ 2,903,997	$ 3,638	$ 2,145	$ 12,052	$ 17,835	$ 2,921,832
Commercial and industrial	1,482,473	1,000	983	8,960	10,943	1,493,416
Commercial construction	243,004	—	—	14,193	14,193	257,197
Residential mortgage	717,447	1,584	520	7,128	9,232	726,679
Home equity	465,152	2,103	609	3,698	6,410	471,562
Installment and other consumer	67,281	148	75	42	265	67,546
Consumer construction	8,416	—	—	—	—	8,416
Loans held for sale	2,371	—	—	—	—	2,371
Total	$ 5,890,141	$ 8,473	$ 4,332	$ 46,073	$ 58,878	$ 5,949,019

We continually monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention or substandard.

Our risk ratings are consistent with regulatory guidance and are as follows:

Pass —The loan is currently performing and is of high quality.

Special Mention —A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the strength of our credit position at some future date. Economic and market conditions, beyond the borrower’s control, may in the future necessitate this classification.

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NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

Substandard —A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:

(dollars in thousands)	June 30, 2019 — Commercial Real Estate	% of Total	Commercial and Industrial	% of Total	Commercial Construction	% of Total	Total	% of Total
Pass	$ 2,750,338	94.6 %	$ 1,483,519	95.1 %	$ 256,351	95.9 %	$ 4,490,208	94.9 %
Special mention	63,993	2.2 %	34,527	2.2 %	7,189	2.7 %	105,708	2.2 %
Substandard	92,564	3.2 %	41,681	2.7 %	3,664	1.4 %	137,909	2.9 %
Total	$ 2,906,895	100.0 %	$ 1,559,727	100.0 %	$ 267,203	100.0 %	$ 4,733,825	100.0 %
	December 31, 2018
(dollars in thousands)	Commercial Real Estate	% of Total	Commercial and Industrial	% of Total	Commercial Construction	% of Total	Total	% of Total
Pass	$ 2,776,292	95.0 %	$ 1,394,427	93.4 %	$ 233,190	90.7 %	$ 4,403,909	94.3 %
Special mention	54,627	1.9 %	25,368	1.7 %	7,349	2.8 %	87,344	1.8 %
Substandard	90,913	3.1 %	73,621	4.9 %	16,658	6.5 %	181,192	3.9 %
Total	$ 2,921,832	100.0 %	$ 1,493,416	100.0 %	$ 257,197	100.0 %	$ 4,672,445	100.0 %

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

We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans.

The following tables present the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented:

(dollars in thousands)	June 30, 2019 — Residential Mortgage	% of Total	Home Equity	% of Total	Installment and Other Consumer	% of Total	Consumer Construction	% of Total	Total	% of Total
Performing	$ 744,573	99.1 %	$ 460,114	99.1 %	$ 72,016	100.0 %	$ 11,784	100.0 %	$ 1,288,487	99.2 %
Nonperforming	6,782	0.9 %	4,081	0.9 %	25	— %	—	— %	10,888	0.8 %
Total	$ 751,355	100.0 %	$ 464,195	100.0 %	$ 72,041	100.0 %	$ 11,784	100.0 %	$ 1,299,375	100.0 %
	December 31, 2018
(dollars in thousands)	Residential Mortgage	% of Total	Home Equity	% of Total	Installment and Other Consumer	% of Total	Consumer Construction	% of Total	Total	% of Total
Performing	$ 719,551	99.0 %	$ 467,864	99.2 %	$ 67,504	99.9 %	$ 8,416	100.0 %	$ 1,263,335	99.1 %
Nonperforming	7,128	1.0 %	3,698	0.8 %	42	0.1 %	—	— %	10,868	0.9 %
Total	$ 726,679	100.0 %	$ 471,562	100.0 %	$ 67,546	100.0 %	$ 8,416	100.0 %	$ 1,274,203	100.0 %

We individually evaluate all substandard and nonaccrual commercial loans greater than $ 0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. A TDR will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For each TDR

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

or other impaired loan, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.

The following table summarizes investments in loans considered to be impaired and related information on those impaired loans as of the dates presented:

(dollars in thousands)	June 30, 2019 — Recorded Investment	Unpaid Principal Balance	Related Allowance	December 31, 2018 — Recorded Investment	Unpaid Principal Balance	Related Allowance
With a related allowance recorded:
Commercial real estate	$ 7,703	$ 7,703	$ 1,530	$ 7,733	$ 7,733	$ 1,295
Commercial and industrial	834	761	204	884	893	360
Commercial construction	490	489	157	489	489	87
Consumer real estate	666	666	307	15	14	10
Other consumer	13	14	14	11	12	11
Total with a Related Allowance Recorded	9,706	9,633	2,212	9,132	9,141	1,763
Without a related allowance recorded:
Commercial real estate	21,592	24,894	—	3,636	4,046	—
Commercial and industrial	9,817	12,550	—	12,788	14,452	—
Commercial construction	2,318	3,828	—	15,286	19,198	—
Consumer real estate	7,863	8,415	—	8,659	9,635	—
Other consumer	3	9	—	5	18	—
Total without a Related Allowance Recorded	41,593	49,696	—	40,374	47,349	—
Total:
Commercial real estate	29,295	32,597	1,530	11,369	11,779	1,295
Commercial and industrial	10,651	13,311	204	13,672	15,345	360
Commercial construction	2,808	4,317	157	15,775	19,687	87
Consumer real estate	8,529	9,081	307	8,674	9,649	10
Other consumer	16	23	14	16	30	11
Total	$ 51,299	$ 59,329	$ 2,212	$ 49,506	$ 56,490	$ 1,763

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

The following tables summarize average recorded investment in and interest income recognized on loans considered to be impaired for the periods presented:

	Three Months Ended — June 30, 2019		June 30, 2018
(dollars in thousands)	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
With a related allowance recorded:
Commercial real estate	$ 7,703	$ —	$ —	$ —
Commercial and industrial	758	13	—	—
Commercial construction	489	—	—	—
Consumer real estate	666	—	—	—
Other consumer	16	—	38	1
Total with a Related Allowance Recorded	9,633	13	38	1
Without a related allowance recorded:
Commercial real estate	21,802	77	3,609	54
Commercial and industrial	7,568	131	8,060	210
Commercial construction	2,319	48	3,443	33
Consumer real estate	7,952	93	9,483	118
Other consumer	3	—	10	—
Total without a Related Allowance Recorded	39,643	349	24,605	415
Total:
Commercial real estate	29,505	77	3,609	54
Commercial and industrial	8,326	144	8,060	210
Commercial construction	2,808	48	3,443	33
Consumer real estate	8,618	93	9,483	118
Other consumer	19	—	48	1
Total	$ 49,276	$ 362	$ 24,643	$ 416

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

	Six Months Ended — June 30, 2019		June 30, 2018
(dollars in thousands)	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
With a related allowance recorded:
Commercial real estate	$ 7,704	$ —	$ —	$ —
Commercial and industrial	772	26	—	—
Commercial construction	489	—	—	—
Consumer real estate	666	—	—	—
Other consumer	18	1	40	2
Total with a Related Allowance Recorded	9,649	27	40	2
Without a related allowance recorded:
Commercial real estate	22,093	124	3,712	85
Commercial and industrial	5,329	189	7,796	218
Commercial construction	2,319	83	3,445	73
Consumer real estate	7,979	188	10,128	253
Other consumer	4	—	11	—
Total without a Related Allowance Recorded	37,723	584	25,092	629
Total:
Commercial real estate	29,797	124	3,712	85
Commercial and industrial	6,101	215	7,796	218
Commercial construction	2,808	83	3,445	73
Consumer real estate	8,645	188	10,128	253
Other consumer	22	1	51	2
Total	$ 47,373	$ 611	$ 25,132	$ 631

*Table of Contents*

S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

The following tables detail activity in the ALL for the periods presented:

(dollars in thousands)	Three Months Ended June 30, 2019 — Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Other Consumer		Total Loans
Balance at beginning of period	$ 34,903		$ 11,996		$ 6,757		$ 6,178		$ 1,575		$ 61,409
Charge-offs	( 528	)	( 1,435	)	—		( 247	)	( 457	)	( 2,667	)
Recoveries	6		91		2		344		89		532
Net Recoveries/(Charge-offs)	( 522	)	( 1,344	)	2		97		( 368	)	( 2,135	)
Provision for loan losses	( 1,545	)	2,575		495		296		384		2,205
Balance at End of Period	$ 32,836		$ 13,227		$ 7,254		$ 6,571		$ 1,591		$ 61,479
	Three Months Ended June 30, 2018
(dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Other Consumer		Total Loans
Balance at beginning of period	$ 30,963		$ 10,472		$ 10,721		$ 5,418		$ 1,472		$ 59,046
Charge-offs	( 237	)	( 7,392	)	( 321	)	( 268	)	( 414	)	( 8,632	)
Recoveries	185		362		1		85		125		758
Net Recoveries/(Charge-offs)	( 52	)	( 7,030	)	( 320	)	( 183	)	( 289	)	( 7,874	)
Provision for loan losses	321		7,432		1,275		6		311		9,345
Balance at End of Period	$ 31,232		$ 10,874		$ 11,676		$ 5,241		$ 1,494		$ 60,517
	Six Months Ended June 30, 2019
(dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Other Consumer		Total Loans
Balance at beginning of period	$ 33,707		$ 11,596		$ 7,983		$ 6,187		$ 1,523		$ 60,996
Charge-offs	( 529	)	( 6,912	)	—		( 410	)	( 840	)	( 8,691	)
Recoveries	128		508		3		492		189		1,320
Net (Charge-offs)/Recoveries	( 401	)	( 6,404	)	3		82		( 651	)	( 7,371	)
Provision for loan losses	( 470	)	8,035		( 732	)	302		719		7,854
Balance at End of Period	$ 32,836		$ 13,227		$ 7,254		$ 6,571		$ 1,591		$ 61,479
	Six Months Ended June 30, 2018
(dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Consumer Real Estate		Other Consumer		Total Loans
Balance at beginning of period	$ 27,235		$ 8,966		$ 13,167		$ 5,479		$ 1,543		$ 56,390
Charge-offs	( 232	)	( 8,222	)	( 321	)	( 429	)	( 872	)	( 10,076	)
Recoveries	228		480		1,130		323		225		2,386
Net Charge-offs	( 4	)	( 7,742	)	809		( 106	)	( 647	)	( 7,690	)
Provision for loan losses	4,001		9,650		( 2,300	)	( 132	)	598		11,817
Balance at End of Period	$ 31,232		$ 10,874		$ 11,676		$ 5,241		$ 1,494		$ 60,517

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. ALLOWANCE FOR LOAN LOSSES – continued

The following tables present the ALL and recorded investments in loans by category as of the periods presented:

	June 30, 2019
	Allowance for Loan Losses			Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total
Commercial real estate	$ 1,530	$ 31,306	$ 32,836	$ 29,295	$ 2,877,600	$ 2,906,895
Commercial and industrial	204	13,023	13,227	10,651	1,549,076	1,559,727
Commercial construction	157	7,097	7,254	2,808	264,395	267,203
Consumer real estate	307	6,264	6,571	8,529	1,218,805	1,227,334
Other consumer	14	1,577	1,591	16	72,025	72,041
Total	$ 2,212	$ 59,267	$ 61,479	$ 51,299	$ 5,981,901	$ 6,033,200
	December 31, 2018
	Allowance for Loan Losses			Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total
Commercial real estate	$ 1,295	$ 32,412	$ 33,707	$ 11,369	$ 2,910,463	$ 2,921,832
Commercial and industrial	360	11,236	11,596	13,672	1,479,744	1,493,416
Commercial construction	87	7,896	7,983	15,775	241,422	257,197
Consumer real estate	10	6,177	6,187	8,674	1,197,983	1,206,657
Other consumer	11	1,512	1,523	16	67,530	67,546
Total	$ 1,763	$ 59,233	$ 60,996	$ 49,506	$ 5,897,142	$ 5,946,648

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 7. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

We determine if a contract is or contains a lease at inception. Leases are classified as either finance or operating leases. We recognize leases on our Consolidated Balance Sheets as ROU assets and related lease liabilities. Finance ROU assets are included in property and equipment and related finance lease liabilities are included in long-term borrowings. Operating lease ROU assets are included in other assets and related operating lease liabilities are included in other liabilities. We estimate lease liabilities and ROU assets using our estimated incremental borrowing rate with similar terms at commencement date. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term for operating leases. Interest and amortization expenses are recognized for finance leases over the lease term.

We have 44 lease contracts that we have recognized under the new lease standard, ASC Topic 842. These leases are for our branch, loan production and support services facilities. We have recognized 42 operating leases and two finance leases under the new lease accounting standard. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term in Net Occupancy on our Consolidated Statements of Comprehensive Income.

The following tables present our ROU assets, lease expense, weighted average term, discount rate and maturity analysis of lease liabilities for finance and operating leases as of June 30, 2019 and for the periods presented:

(in thousands, except weighted-averages)	June 30, 2019 — Three months ended	Six months ended
Operating lease expense	$ 1,034	$ 2,066
Amortization of ROU assets - finance leases	23	45
Interest on lease liabilities - finance leases (1)	18	36
Total Lease Expense	$ 1,075	$ 2,147
Operating Leases
ROU assets		$ 36,417
Operating cash flows		$ 662
Finance Leases
ROU assets		$ 1,191
Operating cash flows		$ 36
Financing cash flows		$ 22
Weighted Average Lease Term - Years
Operating leases		20.14
Finance leases		15.34
Weighted Average Discount Rate
Operating leases		6.15 %
Finance leases		5.98 %
(1) Included in borrowings interest expense in our consolidated statements of comprehensive income. All other lease costs in this table are included in net occupancy expense.

(dollars in thousands) — Maturity Analysis	Finance	Operating			Total
2019	$ 117		$ 3,744		$ 3,861
2020	126		3,623		3,749
2021	126		3,686		3,812
2022	128		3,768		3,896
2023	130		3,703		3,833
Thereafter	1,342		58,045		59,387
Total	$ 1,969		$ 76,569		$ 78,538
Less: Present value discount	( 735	)	( 35,507	)	( 36,242	)
Lease Liabilities	$ 1,234		$ 41,062		$ 42,296

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Interest Rate Swaps

In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the balance sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which we enter into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate loan with us receiving a variable rate. These agreements could have floors or caps on the contracted interest rates.

Pursuant to our agreements with various financial institutions, we may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon our current positions and related future collateral requirements, we believe any effect on our cash flow or liquidity position to be immaterial.

Derivatives contain an element of credit risk, the possibility that we will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by our Asset and Liability Committee, or ALCO, and derivatives with customers may only be executed with customers within credit exposure limits approved by our Senior Loan Committee. Interest rate swaps are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Comprehensive Income.

Interest Rate Lock Commitments and Forward Sale Contracts

In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan market. We also offer interest rate lock commitments to potential borrowers. The commitments are generally for a period of 60 days and guarantee a specified interest rate for a loan if underwriting standards are met, but the commitment does not obligate the potential borrower to close on the loan. Accordingly, some commitments expire prior to becoming loans. We may encounter pricing risks if interest rates increase significantly before the loan can be closed and sold. We may utilize forward sale contracts in order to mitigate this pricing risk. Whenever a customer desires these products, a mortgage originator quotes a secondary market rate guaranteed for that day by the investor. The rate lock is executed between the mortgagee and us and in turn a forward sale contract may be executed between us and the investor. Both the rate lock commitment and the corresponding forward sale contract for each customer are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives during the commitment period are recorded in current earnings and included in mortgage banking in the Consolidated Statements of Comprehensive Income.

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – continued

The following table indicates the amounts representing the value of derivative assets and derivative liabilities as of the dates presented:

(dollars in thousands)	June 30, 2019	December 31, 2018	June 30, 2019	December 31, 2018
Derivatives not Designated as Hedging Instruments:
Interest Rate Swap Contracts - Commercial Loans
Fair value	$ 22,688	$ 5,504	$ 22,620	$ 5,340
Notional amount	449,576	325,750	449,576	325,750
Collateral received/posted	—	160	21,556	—
Interest Rate Lock Commitments - Mortgage Loans
Fair value	649	251	—	—
Notional amount	15,104	6,054	—	—
Forward Sale Contracts - Mortgage Loans
Fair value	—	55	105	—
Notional amount	$ —	$ 6,000	$ 15,404	$ —

Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation.

The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets as of the dates presented:

(dollars in thousands)	Derivatives (included in Other Assets) — June 30, 2019	December 31, 2018		June 30, 2019		December 31, 2018
Derivatives not Designated as Hedging Instruments:
Gross amounts recognized	$ 22,810		$ 8,733		$ 22,742		$ 8,569
Gross amounts offset	( 122	)	( 3,229	)	( 122	)	( 3,229	)
Net Amounts Presented in the Consolidated Balance Sheets	22,688		5,504		22,620		5,340
Gross amounts not offset (1)	—		( 160	)	( 21,556	)	—
Net Amount	$ 22,688		$ 5,344		$ 1,064		$ 5,340

(1) Amounts represent collateral received/posted for the periods presented.

The following table indicates the gain or loss recognized in income on derivatives for the periods presented:

(dollars in thousands)	Three Months Ended June 30, — 2019	2018		2019		2018
Derivatives not Designated as Hedging Instruments
Interest rate swap contracts—commercial loans	$ 26		$ ( 201	)	$ ( 96	)	$ ( 85	)
Interest rate lock commitments—mortgage loans	310		128		398		172
Forward sale contracts—mortgage loans	( 193	)	( 15	)	( 160	)	( 33	)
Total Derivatives Gain/(Loss)	$ 143		$ ( 88	)	$ 142		$ 54

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 9. BORROWINGS

Short-term borrowings are for terms under or equal to one year and are comprised of securities sold under repurchase agreements, or REPOs and FHLB advances. All REPOs are overnight short-term investments and are not insured by the Federal Deposit Insurance Corporation, or FDIC. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and, therefore, the REPOs are accounted for as secured borrowings. Mortgage-backed securities with amortized cost of $ 16.5 million and carrying value of $ 16.7 million at June 30, 2019 and amortized cost of $ 24.2 million and carrying value of $ 23.9 million at December 31, 2018 , were pledged as collateral for these secured transactions. The pledged securities are held in safekeeping at the Federal Reserve. Due to the overnight short-term nature of REPOs, potential risk due to a decline in the value of the pledged collateral is low. Collateral pledging requirements with REPOs are monitored daily. FHLB advances are for various terms and are secured by a blanket lien on residential mortgages and other real estate secured loans.

Long-term borrowings are for original terms greater than one year and are comprised of FHLB advances, two capital leases and junior subordinated debt securities. Long-term FHLB advances are secured by the same loans as short-term FHLB advances. We had total long-term borrowings outstanding of $ 5.5 million at a fixed rate and $ 63.1 million at a variable rate at June 30, 2019 , excluding our capital leases.

Information pertaining to borrowings is summarized in the table below as of the dates presented:

(dollars in thousands)	June 30, 2019 — Balance	Weighted Average Rate	December 31, 2018 — Balance	Weighted Average Rate
Short-term Borrowings
Securities sold under repurchase agreements	$ 14,154	0.74 %	$ 18,383	0.46 %
Short-term borrowings	295,000	2.50 %	470,000	2.65 %
Total Short-term Borrowings	309,154	2.42 %	488,383	2.57 %
Long-term Borrowings
Long-term borrowings	69,791	2.73 %	70,314	2.84 %
Junior subordinated debt securities	45,619	4.87 %	45,619	5.25 %
Total Long-term Borrowings	115,410	3.58 %	115,933	3.79 %
Total Borrowings	$ 424,564	2.74 %	$ 604,316	2.80 %

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

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 10. COMMITMENTS AND CONTINGENCIES

Commitments

In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

The following table sets forth our commitments and letters of credit as of the dates presented:

(dollars in thousands) — Commitments to extend credit	$ 1,561,464	$ 1,464,892
Standby letters of credit	74,270	77,134
Total	$ 1,635,734	$ 1,542,026

Litigation

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

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 11. REVENUE FROM CONTRACTS WITH CUSTOMERS

We earn revenue from contracts with our customers when we have completed our performance obligations and recognize that revenue when services are provided to our customers. Our contracts with customers are primarily in the form of account agreements. Generally, our services are transferred at a point in time in response to transactions initiated and controlled by our customers under service agreements with an expected duration of one year or less. Our customers have the right to terminate their services agreements at any time.

We do not defer incremental direct costs to obtain contracts with customers that would be amortized in one year or less. These costs are primarily salaries and employee benefits recognized as expense in the period incurred.

Service charges on deposit accounts - We recognize monthly service charges for both commercial and personal banking customers based on account fee schedules. Our performance obligation is generally satisfied and the related revenue recognized at a point in time or over time when the services are provided. Other fees are earned based on specific transactions or customer activity within the customers' deposit accounts. These are earned at the time the transaction or customer activity occurs.

Debit and credit card services - Interchange fees are earned whenever debit and credit cards are processed through third-party card payment networks. ATM fees are based on transactions by our customers' and other customers' use of our ATMs or other ATMs. Debit and credit card revenue is recognized at a point in time when the transaction is settled. Our performance obligation to our customers is generally satisfied and the related revenue is recognized at a point in time when the service is provided. Third-party service contracts include annual volume and marketing incentives which are recognized over a period of twelve months when we meet thresholds as stated in the service contract.

Wealth management services - Wealth management services are primarily comprised of fees earned from the management and administration of trusts, assets under administration and other financial advisory services. Generally, wealth management fees are earned over a period of time between monthly and annually, per the related fee schedules. Our performance obligations with our customers are generally satisfied when we provide the services as stated in the customers' agreements. The fees are based on a fixed amount or a scale based on the level of services provided or amount of assets under management.

Other fee revenue - Other fee revenue includes a variety of other traditional banking services such as, electronic banking fees, letters of credit origination fees, wire transfer fees, money orders, treasury checks, checksale fees and transfer fees. Our performance obligations are generally satisfied at a point in time, fee revenue is recognized when the services are provided or the transaction is settled.

The information presented in the following table presents the point of revenue recognition for revenue from contracts with customers. Other revenue streams such as: interest income, net securities gains and losses, insurance, mortgage banking and other revenues that are accounted for under other generally accepted accounting principles are excluded.

(dollars in thousands) — Revenue Streams	Point of Revenue Recognition	Three Months Ended June 30, — 2019	2018	Six Months Ended June 30, — 2019	2018
Service charges on deposit accounts	Over a period of time	$ 451	$ 453	$ 908	$ 987
	At a point in time	2,761	2,774	5,457	5,481
		$ 3,212	$ 3,227	$ 6,365	$ 6,468
Debit and credit card	Over a period time	$ 177	$ 151	$ 362	$ 339
	At a point in time	3,324	3,158	6,114	6,008
		$ 3,501	$ 3,309	$ 6,476	$ 6,347
Wealth management	Over a period of time	$ 409	$ 793	$ 822	$ 1,596
	At a point in time	1,653	1,823	3,288	3,702
		$ 2,062	$ 2,616	$ 4,109	$ 5,298
Other fee revenue	At a point in time	$ 1,145	$ 887	$ 2,064	$ 1,754

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 12. OTHER COMPREHENSIVE INCOME/(LOSS)

The following tables present the change in components of other comprehensive income/(loss) for the periods presented, net of tax effects.

(dollars in thousands)	Three Months Ended June 30, 2019 — Pre-Tax Amount	Tax (Expense) Benefit	Net of Tax Amount	Pre-Tax Amount		Tax Benefit (Expense)		Net of Tax Amount
Change in net unrealized gains/(losses) on debt securities available-for-sale	$ 8,968	$ ( 1,912	)	$ 7,056	$ ( 2,296	)	$ 487		$ ( 1,809	)
Adjustment to funded status of employee benefit plans	452	( 96	)	356	702		( 149	)	553
Other Comprehensive Income/(Loss)	$ 9,420	$ ( 2,008	)	$ 7,412	$ ( 1,594	)	$ 338		$ ( 1,256	)
	Six Months Ended June 30, 2019			Six Months Ended June 30, 2018
(dollars in thousands)	Pre-Tax Amount	Tax (Expense) Benefit	Net of Tax Amount	Pre-Tax Amount		Tax (Expense) Benefit		Net of Tax Amount
Change in net unrealized (losses)/gains on debt securities available-for-sale (1)	$ 16,366	$ ( 3,490	)	$ 12,876	$ ( 11,770	)	$ 2,499		$ ( 9,271	)
Adjustment to funded status of employee benefit plans	905	( 193	)	712	1,323		( 281	)	1,042
Other Comprehensive (Loss)/Income	$ 17,271	$ ( 3,683	)	$ 13,588	$ ( 10,447	)	$ 2,218		$ ( 8,229	)
(1) Due to the adoption of ASU No. 2016-01, net unrealized gains on marketable equity securities were reclassified from accumulated other comprehensive income to retained earnings during the three months ended March 31, 2018.
(2) Reclassification adjustments are comprised of realized security gains or losses. The realized gains or losses have been reclassified out of accumulated other comprehensive income/(loss) and have affected certain lines in the Consolidated Statements of Comprehensive Income as follows: the pre-tax amount is included in securities gains/losses-net, the tax expense amount is included in the provision for income taxes and the net of tax amount is included in net income.

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S&T BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 13. EMPLOYEE BENEFITS

Our qualified and nonqualified defined benefit plans were amended to freeze benefit accruals for all persons entitled to benefits under the plans in 2016. We will continue recording pension expense related to these plans, primarily representing interest costs on the accumulated benefit obligation and amortization of actuarial losses accumulated in the plans, as well as income from expected investment returns on pension assets. Since the plans have been frozen, no service costs are included in net periodic pension expense.

At the end of the third quarter of 2018, we made a $ 20.4 million contribution to our qualified defined benefit plan. The investment policy for the Plan now is 85 percent to 95 percent fixed income and 5 percent to 15 percent equity and cash, which is a shift from 50 percent to 70 percent in equities and 30 percent to 50 percent fixed income and cash in 2018. The expected long-term rate of return on plan assets is 4.80 percent compared to 7.50 percent in prior periods.

The pension contribution was deducted on our 2017 Consolidated Federal Income Tax Return and we recognized a return to provision discrete tax benefit of $ 2.9 million due to the decrease in the federal statutory rate of 35 percent to 21 percent resulting from tax legislation in December 2017.

The following table summarizes the components of net periodic pension cost for the periods presented:

(dollars in thousands)	Three Months Ended June 30, — 2019	2018		2019		2018
Components of Net Periodic Pension Cost
Interest cost on projected benefit obligation	$ 989		$ 967		$ 1,978		$ 1,934
Expected return on plan assets	( 1,181	)	( 1,567	)	( 2,361	)	( 3,134	)
Net amortization	395		545		789		1,089
Net Periodic Pension Expense	$ 203		$ ( 55	)	$ 406		$ ( 111	)

The components of net periodic pension expense are included in salaries and employee benefits on the Consolidated Statements of Comprehensive Income.

NOTE 14. QUALIFIED AFFORDABLE HOUSING AND HISTORIC REHABILITATION PROJECTS

As part of our responsibilities under the Community Reinvestment Act and due to their favorable federal income tax benefits, we invest in Low Income Housing and Historic Rehabilitation projects. As a limited partner in these operating partnerships, we receive tax credits and tax deductions for losses incurred by the underlying properties. We use the cost method to account for these partnerships.

Our total investment in qualified affordable housing projects was $ 4.6 million at June 30, 2019 and $ 6.0 million at December 31, 2018 . Amortization expense, included in other noninterest expense in the Consolidated Statements of Comprehensive Income, was $ 0.7 million and $ 1.4 million for the three and six months ended June 30, 2019 and June 30, 2018. The amortization expense was offset by tax credits of $ 0.7 million and $ 1.5 million for the three and six months ended June 30, 2019 and $ 0.8 million and $ 1.5 million for the three and six months ended June 30, 2018 as a reduction to our federal tax provision.

Our total investment in historic rehabilitation was $ 0.3 million at June 30, 2019 and December 31, 2018. Federal tax credits of $ 0.2 million and $ 0.5 million were recognized as a reduction to our federal tax provision for the three and six months ended June 30, 2019. No federal historic rehabilitation tax credits were earned in 2018.

NOTE 15. SALE OF A MAJORITY INTEREST OF INSURANCE BUSINESS

On November 9, 2017, we entered into an asset purchase agreement to sell a 70 percent ownership interest in the assets of our subsidiary, S&T Evergreen Insurance, LLC. The partial sale was accounted for as the sale of a business. At the date of the sale, January 1, 2018, we ceased to have a controlling financial interest, deconsolidated the subsidiary and recognized a gain of $ 1.9 million . We transferred our remaining 30 percent share of net assets from S&T Evergreen Insurance, LLC to a new entity for a 30 percent partnership interest in a new insurance entity. We use the equity method of accounting to recognize changes in the value of our investment in the new insurance entity for our proportional share of income and losses of the new insurance entity.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 16. SHARE REPURCHASE PLAN

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, represents an overview of our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations at and for the three and six month periods ended June 30, 2019 and 2018 . Our MD&A should be read in conjunction with our Consolidated Financial Statements and Notes. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting S&T and its future business and operations including statements related to the expected timing of the closing of the proposed merger and the expected returns and other benefits of the proposed merger to shareholders . Forward looking statements are typically identified by words or phrases such as “will likely result”, “expect”, “anticipate”, “estimate”, “forecast”, “project”, “intend”, “ believe”, “assume”, “strategy”, “trend”, “plan”, “outlook”, “outcome”, “continue”, “remain”, “potential”, “opportunity”, “believe”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”, “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Forward-looking statements represent management’s beliefs, based upon information available at the time the statements are made, with regard to the matters addressed; they are not guarantees of future performance. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses; cyber-security concerns; rapid technological developments and changes; sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; regulatory supervision and oversight; legislation affecting the financial services industry as a whole, and S&T, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; containing costs and expenses; reliance on significant customer relationships; general economic or business conditions; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; and re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Additionally, there can be no assurances that the proposed merger with DNB will close when expected or the expected returns and other benefits of the proposed merger to shareholders will be achieved. Factors that could cause or contribute to such differences include, but are not limited to, the possibility that expected benefits may not materialize in the time frames expected or at all, or may be more costly to achieve; that the merger transaction may not be timely completed, if at all; that prior to completion of the merger transaction or thereafter, the parties’ respective businesses may not perform as expected due to transaction-related uncertainties or other factors; that the parties are unable to implement successful integration strategies; that the required regulatory, shareholder, or other closing conditions are not satisfied in a timely manner, or at all; reputational risks and the reaction of the parties’ customers to the merger transaction; diversion of management time to merger-related issues. Many of these factors, as well as other factors, are described in our Annual Report on Form 10-K for the year ended December 31, 2018 , including Part I, Item 1A-"Risk Factors" and any of our subsequent filings with the SEC. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.

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

Critical Accounting Policies and Estimates

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

Overview

We are a bank holding company that is headquartered in Indiana, Pennsylvania with assets of $7.3 billion at June 30, 2019 . We operate in five markets including Western Pennsylvania, Central Pennsylvania, Northeast Ohio, Central Ohio, and Upstate New York. We employ a geographic market based strategy in order to drive organic growth. Each of our five markets is led by a Market President who is responsible for developing strategic initiatives specific to each market. We acknowledge that each of our five markets are in different stages of development and that our market based strategy will allow us to customize our approach to each market given its developmental stage and unique characteristics.

We provide a full range of financial services with retail and commercial banking products, cash management services, trust and financial services and insurance products. Our common stock trades on the NASDAQ Global Select Market under the symbol “STBA.”

We earn revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. We incur expenses for the cost of deposits and other funding sources, provision for loan losses and other operating costs such as salaries and employee benefits, data processing and information technology, occupancy and tax expense.

Our mission is to become the financial services provider of choice within the markets that we serve. We strive to do this by delivering exceptional service and value. Our strategic plan focuses on organic growth, which includes both growth within our current footprint and growth through market expansion. We also actively evaluate acquisition opportunities as another source of growth. Our strategic plan includes a collaborative model that combines expertise from all areas of our business and focuses on satisfying each customer’s individual financial objectives.

On June 5, 2019, we entered into a definitive Agreement and Plan of Merger to acquire DNB Financial Corporation, or DNB, based in Downingtown, Pennsylvania. DNB had approximately $1.2 billion in assets at March 31, 2019 and maintains 14 branches in Chester, Delaware and Philadelphia counties. The acquisition will expand our footprint into Southeastern Pennsylvania. Pursuant to the Agreement and Plan of Merger, DNB will merge with and into S&T, with S&T continuing as the surviving entity. Under the terms of the Agreement and Plan of Merger, DNB shareholders will have the right to receive 1.22 shares of common stock, par value $2.50 per share, of S&T for each share of common stock, par value $1.00 per share, of DNB. Immediately following the merger of DNB and S&T, DNB’s wholly owned bank subsidiary, DNB First, National Association, will merge with and into S&T’s wholly owned bank subsidiary, S&T Bank, with S&T Bank as the surviving entity. The Agreement and Plan of Merger was unanimously approved by the Board of Directors of each of S&T and DNB. The transaction is expected to close in the fourth quarter of 2019 after satisfaction of customary closing conditions, including regulatory approvals and approval of the shareholders of DNB.

Our focus continues to be on organic loan and deposit growth and implementing opportunities to increase fee income while closely monitoring our operating expenses and asset quality. We are focused on executing our strategy to successfully build our brand and grow our business in all of our markets.

Earnings Summary

Net income increased $4.7 million, or 21.8 percent, for the three months ended June 30, 2019 and increased $1.4 million, or 3.0 percent, for the six months ended June 30, 2019 compared to the same periods in 2018. Net income for the three and six months ended June 30, 2019 was $26.1 million and $49.0 million, or $0.76 and $1.43 diluted earnings per share, as compared to $21.4 million and $47.6 million, or $0.61 and $1.36 diluted earnings per share for the same periods in 2018.

The increase in net income for the three month period ended June 30, 2019 of $4.7 million was primarily due to a decrease in the provision for loan losses of $7.1 million and an increase in net interest income of $2.4 million offset by an increase in noninterest expense of $4.5 million and an increase of $1.1 million in the provision for income taxes. The increase in net income for the six month period ended June 30, 2019 of $1.4 million was primarily due to an increase in net interest income of $5.9 million, a decrease in the provision for loan losses of $3.9 million and a decrease of $0.7 million in the provision for income taxes offset by a decrease noninterest income of $1.8 million and an increase of $7.3 million in noninterest expense.

Net interest income increased $2.4 million and $5.9 million to $60.8 million and $121.2 million for the three and six months ended June 30, 2019 compared to net interest income of $58.4 million and $115.3 million for the same periods in 2018. Average interest-earning assets increased $178.6 million and $175.5 million for the three and six months ended June 30, 2019

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

compared to the same periods in 2018. Average interest-bearing liabilities increased $42.6 million and $42.2 for the three and six months ended June 30, 2019 compared to the same periods in 2018. Net interest margin, on a fully taxable-equivalent, or FTE basis (non-GAAP), increased four and nine basis points to 3.68 percent and 3.70 percent in the three and six months ended June 30, 2019 compared to 3.64 percent and 3.61 percent for the same periods in 2018. The increases in short-term interest rates over the past year positively impacted both net interest income and net interest margin. Net interest margin is reconciled to net interest income adjusted to an FTE basis in the "Results of Operations - Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018 - Net Interest Income" section of this MD&A.

The provision for loan losses decreased $7.1 million and $3.9 million to $2.2 million and $7.9 million for the three and six months ended June 30, 2019 compared to $9.3 million and $11.8 million for the same periods in 2018. The decrease in the provision for loan losses for both periods mainly related to a decrease in loan charge-offs. For the three and six months ended June 30, 2019, we had net charges-offs of $2.1 million and $7.4 million compared to $7.9 million and $7.7 million for the same periods in 2018. Annualized net loan charge-offs to average loans was 0.14 percent and 0.25 percent for the three and six months ended June 30, 2019 compared to 0.55 percent and 0.27 percent for the same periods in 2018. Impaired loans increased $17.5 million to $51.3 million at June 30, 2019 compared to $33.8 million at June 30, 2018 and specific reserves on impaired loans increased $2.2 million compared to the same period in the prior year. Nonperforming loans increased $23.6 million to $45.0 million at June 30, 2019 compared to $21.4 million at June 30, 2018.

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

Noninterest expense increased $4.5 million to $40.4 million for the three months ended June 30, 2019 and $7.3 million to $79.3 million for the six months ended June 30, 2019 compared to the same periods in 2018. The most significant increases in expense related to salaries and employee benefits and data processing and information technology. Salaries and employee benefits expense increased $1.7 million for the three months ended and $3.8 million for the six months ended June 30, 2019 compared to the same periods in 2018 mainly due to annual merit increases and higher severance, incentive and pension costs. Data processing and information technology increased $1.0 million for the three months ended and $1.9 million for the six months ended June 30, 2019 compared to the same periods in 2018 due to the recent outsourcing arrangement for certain components of our IT function and the annual increase with our third-party data processor. Additionally, we incurred merger related expenses of $0.6 million for professional services during the second quarter of 2019.

The provision for income taxes increased $1.1 million for the three months ended June 30, 2019 as a result of an increase in pretax income of $5.7 million compared to the same period in 2018. The provision for income taxes decreased $0.7 million for the six months ended June 30, 2019 compared to the same periods in 2018 primarily due to non-recurring discrete items of $0.9 million related to the sale of a majority interest of our insurance business in the first quarter of 2018. Our effective tax rate increased to 16.3 percent for the three month period ended June 30, 2019 and decreased to 15.9 percent for the six month period ended June 30, 2019 compared to 15.8 percent and 17.4 percent for the same periods in 2018.

Explanation of Use of Non-GAAP Financial Measures

In addition to the results of operations presented in accordance with generally accepted accounting principles, or GAAP, in the United States, management uses, and this quarterly report references, net interest income and net interest margin on a fully taxable equivalent, or FTE, basis, which are non-GAAP financial measures. Management believes net interest income and net interest margin on an FTE basis provide information useful to investors in understanding our underlying business, operational performance and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered alternatives to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies.

We believe the presentation of net interest income and net interest margin on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (GAAP) per the Consolidated Statements of Comprehensive Income is reconciled to net interest income adjusted on an FTE basis and net interest margin adjusted on an FTE basis in the "Results of Operations - Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018 - Net Interest Income" section of this MD&A.

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

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2019 Compared to

Three and Six Months Ended June 30, 2018

Net Interest Income

Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our ALCO, in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what we believe is an acceptable level of net interest income.

The interest income on interest-earning assets and the net interest margin are presented on an FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory tax rate of 21 percent for each period and the dividend-received deduction for equity securities. We believe this to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable sources of interest income.

The following table reconciles interest income per the Consolidated Statements of Comprehensive Income to net interest income and rates on an FTE basis for the periods presented:

(dollars in thousands)	Three Months Ended June 30, — 2019	2018	Six Months Ended June 30, — 2019	2018
Total interest income	$ 79,624	$ 71,581	$ 158,214	$ 139,610
Total interest expense	18,797	13,178	37,031	24,276
Net Interest Income per Consolidated Statements of Comprehensive Income	60,827	58,403	121,183	115,334
Adjustment to FTE basis	958	938	1,919	1,878
Net Interest Income on an FTE Basis (Non-GAAP)	$ 61,785	$ 59,341	$ 123,102	$ 117,212
Net interest margin	3.63 %	3.58 %	3.64 %	3.56 %
Adjustment to FTE basis	0.05 %	0.06 %	0.06 %	0.05 %
Net Interest Margin on an FTE Basis (Non-GAAP)	3.68 %	3.64 %	3.70 %	3.61 %

Income amounts are annualized for rate calculations.

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

Average Balance Sheet and Net Interest Income Analysis (FTE)

The following tables provide information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:

(dollars in thousands)	Three Months Ended June 30, 2019 — Average Balance	Interest	Rate	Three Months Ended June 30, 2018 — Average Balance	Interest	Rate
ASSETS
Interest-bearing deposits with banks	$ 49,949	$ 274	2.19 %	$ 55,015	$ 221	1.60 %
Securities, at fair value (2)(3)	673,117	4,482	2.66 %	685,132	4,450	2.60 %
Loans held for sale	1,452	16	4.44 %	1,528	28	7.43 %
Commercial real estate	2,895,146	36,158	5.01 %	2,774,882	32,617	4.71 %
Commercial and industrial	1,559,222	20,087	5.17 %	1,431,861	16,627	4.66 %
Commercial construction	242,192	3,242	5.37 %	324,934	3,857	4.76 %
Total Commercial Loans	4,696,560	59,487	5.08 %	4,531,677	53,101	4.70 %
Residential mortgage	734,372	8,253	4.50 %	691,634	7,314	4.23 %
Home equity	463,480	6,267	5.42 %	472,927	5,676	4.81 %
Installment and other consumer	71,319	1,286	7.23 %	67,186	1,138	6.79 %
Consumer construction	11,014	149	5.41 %	4,570	54	4.76 %
Total Consumer Loans	1,280,185	15,955	4.99 %	1,236,317	14,182	4.60 %
Total Portfolio Loans	5,976,745	75,442	5.06 %	5,767,994	67,283	4.68 %
Total Loans (1)(2)	5,978,197	75,458	5.06 %	5,769,522	67,311	4.68 %
Federal Home Loan Bank and other restricted stock	21,141	368	6.97 %	34,130	537	6.30 %
Total Interest-earning Assets	6,722,404	80,582	4.81 %	6,543,799	72,519	4.44 %
Noninterest-earning assets	523,636			491,246
Total Assets	$ 7,246,040			$ 7,035,045
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand	$ 550,200	631	0.46 %	$ 571,260	437	0.31 %
Money market	1,695,349	8,169	1.93 %	1,251,171	4,027	1.29 %
Savings	760,743	484	0.26 %	851,702	429	0.20 %
Certificates of deposit	1,389,968	6,771	1.95 %	1,295,473	4,273	1.32 %
Total Interest-bearing Deposits	4,396,260	16,055	1.46 %	3,969,606	9,166	0.93 %
Securities sold under repurchase agreements	16,337	28	0.69 %	48,980	50	0.41 %
Short-term borrowings	242,759	1,642	2.71 %	617,891	3,179	2.06 %
Long-term borrowings	70,049	500	2.86 %	46,317	259	2.24 %
Junior subordinated debt securities	45,619	572	5.03 %	45,619	525	4.61 %
Total Borrowings	374,764	2,742	2.94 %	758,807	4,012	2.12 %
Total Interest-bearing Liabilities	4,771,024	18,797	1.58 %	4,728,413	13,178	1.12 %
Noninterest-bearing liabilities	1,523,676			1,403,771
Shareholders’ equity	951,340			902,861
Total Liabilities and Shareholders’ Equity	$ 7,246,040			$ 7,035,045
Net Interest Income (2)(3)		$ 61,785			$ 59,341
Net Interest Margin (2)(3)			3.68 %			3.64 %

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

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018.

(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

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

(dollars in thousands)	Six Months Ended June 30, 2019 — Average Balance	Interest	Rate	Six Months Ended June 30, 2018 — Average Balance	Interest	Rate
ASSETS
Interest-bearing deposits with banks	$ 51,758	$ 626	2.42 %	$ 55,509	$ 451	1.63 %
Securities, at fair value (2)(3)	676,797	9,039	2.67 %	686,017	8,803	2.57 %
Loans held for sale	1,175	25	4.29 %	1,737	56	6.44 %
Commercial real estate	2,900,181	72,122	5.01 %	2,733,168	62,924	4.64 %
Commercial and industrial	1,534,080	39,420	5.18 %	1,431,725	32,187	4.53 %
Commercial construction	246,073	6,554	5.37 %	349,893	8,032	4.63 %
Total Commercial Loans	4,680,334	118,096	5.09 %	4,514,786	103,143	4.61 %
Residential mortgage	728,495	16,123	4.44 %	692,961	14,554	4.21 %
Home equity	465,598	12,536	5.43 %	476,967	10,975	4.64 %
Installment and other consumer	70,215	2,508	7.20 %	67,025	2,241	6.74 %
Consumer construction	10,244	293	5.77 %	4,192	98	4.73 %
Total Consumer Loans	1,274,552	31,460	4.96 %	1,241,145	27,868	4.52 %
Total Portfolio Loans	5,954,886	149,556	5.06 %	5,755,931	131,011	4.59 %
Total Loans (1)(2)	5,956,061	149,581	5.06 %	5,757,668	131,067	4.59 %
Federal Home Loan Bank and other restricted stock	22,797	887	7.79 %	32,681	1,167	7.13 %
Total Interest-earning Assets	6,707,413	160,133	4.81 %	6,531,875	141,488	4.36 %
Noninterest-earning assets	521,082			490,476
Total Assets	$ 7,228,495			$ 7,022,351
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand	$ 547,960	1,183	0.44 %	$ 573,307	806	0.28 %
Money market	1,632,234	15,461	1.91 %	1,222,770	7,259	1.20 %
Savings	765,638	957	0.25 %	862,947	866	0.20 %
Certificates of deposit	1,412,117	13,435	1.92 %	1,325,379	8,081	1.23 %
Total Interest-bearing Deposits	4,357,949	31,036	1.44 %	3,984,403	17,012	0.86 %
Securities sold under repurchase agreements	19,735	57	0.59 %	48,380	96	0.40 %
Short-term borrowings	280,862	3,787	2.72 %	607,013	5,687	1.89 %
Long-term borrowings	70,122	993	2.85 %	46,626	490	2.12 %
Junior subordinated debt securities	45,619	1,158	5.12 %	45,619	991	4.38 %
Total Borrowings	416,338	5,995	2.90 %	747,638	7,264	1.96 %
Total Interest-bearing Liabilities	4,774,287	37,031	1.56 %	4,732,041	24,276	1.03 %
Noninterest-bearing liabilities	1,505,964			1,393,939
Shareholders’ equity	948,244			896,371
Total Liabilities and Shareholders’ Equity	$ 7,228,495			$ 7,022,351
Net Interest Income (2)(3)		$ 123,102			$ 117,212
Net Interest Margin (2)(3)			3.70 %			3.61 %

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

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018.

(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

Net interest income on an FTE basis (non-GAAP) increased $2.4 million, or 4.1 percent, for the three months ended June 30, 2019 and increased $5.9 million, or 5.0 percent, for the six months ended June 30, 2019, compared to the same periods in 2018. The net interest margin on an FTE basis (non-GAAP) increased four basis points for the three months ended June 30, 2019 and nine basis points for the six months ended June 30, 2019, compared to the same periods in 2018. The increases were primarily due to higher short-term interest rates.

Interest income on an FTE basis (non-GAAP) increased $8.1 million, or 11.1 percent, for the three months ended June 30, 2019 and increased $18.6 million, or 13.2 percent, for the six months ended June 30, 2019, compared to the same periods in

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

The increases were primarily due to increases in average interest-earning assets of $178.6 million and $175.5 million for the three and six months ended June 30, 2019 and higher short-term interest rates, compared to the same periods in 2018. Average loan balances increased $208.7 million and $198.4 million compared to the same periods in 2018, due to organic loan growth, primarily in the commercial loan portfolio. The average rate earned on loans increased 38 and 47 basis points compared to the same periods in 2018, primarily due to higher short-term interest rates. Average investment securities decreased $12.0 million and $9.2 million and the average rate earned increased six and ten basis points due to higher rates, compared to the same periods in 2018. Overall, the FTE rate on interest-earning assets (non-GAAP) increased 37 and 45 basis points for the three and six months ended June 30, 2019, compared to the same periods in 2018.

Interest expense increased $5.6 million and $12.8 million for the three and six months ended June 30, 2019, compared to the same periods in 2018. The increases were primarily due to higher short-term interest rates. Average interest-bearing deposits increased $426.7 million and $373.5 million for the three and six months ended June 30, 2019, compared to the same periods in 2018. Average money market balances increased $444.2 million and the average rate paid increased 64 basis points for the three months ended June 30, 2019 and increased $409.5 million and 71 basis points for the six months ended June 30, 2019, compared to the same periods in 2018, due to higher short-term interest rates and promotional pricing. The money market balance increases are partially attributable to a shift in deposit mix, as average interest-bearing demand and savings balances declined during these periods. The growth in average interest-bearing deposits is complemented by average noninterest-bearing demand balance increases of $103.9 million and $98.0 million for the three and six months ended June 30, 2019, compared to the same periods in 2018. Average total borrowings decreased $384.0 million and $331.3 million for the three and six months ended June 30, 2019, compared to the same periods in 2018, due to increased deposits. Overall, the cost of interest-bearing liabilities increased 46 and 53 basis points for the three and six months ended June 30, 2019, compared to the same periods in 2018.

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

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:

(dollars in thousands)	Three Months Ended June 30, 2019 Compared to June 30, 2018 — Volume (4)		Rate (4)		Total		Six Months Ended June 30, 2019 Compared to June 30, 2018 — Volume (4)		Rate (4)		Total
Interest earned on:
Interest-bearing deposits with banks	$ (20	)	$ 73		$ 53		$ (30	)	$ 205		$ 175
Securities, at fair value (2)(3)	(78	)	110		32		(119	)	355		236
Loans held for sale	(1	)	(11	)	(12	)	(18	)	(13	)	(31	)
Commercial real estate	1,414		2,127		3,541		3,845		5,353		9,198
Commercial and industrial	1,479		1,981		3,460		2,301		4,932		7,233
Commercial construction	(982	)	367		(615	)	(2,383	)	905		(1,478	)
Total Commercial Loans	1,911		4,475		6,386		3,763		11,190		14,953
Residential mortgage	451		488		939		747		822		1,569
Home equity	(113	)	704		591		(261	)	1,822		1,561
Installment and other consumer	70		78		148		107		160		267
Consumer construction	77		18		95		142		53		195
Total Consumer Loans	485		1,288		1,773		735		2,857		3,592
Total Portfolio Loans	2,396		5,763		8,159		4,498		14,047		18,545
Total Loans (1)(2)	2,395		5,752		8,147		4,480		14,034		18,514
Federal Home Loan Bank and other restricted stock	(204	)	35		(169	)	(355	)	75		(280	)
Change in Interest Earned on Interest-earning Assets	2,093		5,970		8,063		3,976		14,669		18,645
Interest paid on:
Interest-bearing demand	($15	)	$209		$194		($36	)	$413		$377
Money market	1,430		2,712		4,142		2,432		5,770		8,202
Savings	(46	)	101		55		(98	)	189		91
Certificates of deposit	312		2,186		2,498		529		4,825		5,354
Total Interest-bearing Deposits	1,681		5,208		6,889		2,827		11,197		14,024
Securities sold under repurchase agreements	(33	)	11		(22	)	(57	)	18		(39	)
Short-term borrowings	(1,930	)	393		(1,537	)	(3,056	)	1,156		(1,900	)
Long-term borrowings	132		109		241		248		255		503
Junior subordinated debt securities	—		47		47		—		167		167
Total Borrowings	(1,831	)	560		(1,271	)	(2,865	)	1,596		(1,269	)
Change in Interest Paid on Interest-bearing Liabilities	(150	)	5,768		5,618		(38	)	12,793		12,755
Change in Net Interest Income	$ 2,243		$ 202		$ 2,445		$ 4,014		$ 1,876		$ 5,890

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

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018.

(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

(4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Loan Losses

The provision for loan losses is the adjustment to the allowance for loan losses, or ALL, after net loan charge-offs have been deducted to bring the ALL to a level determined to be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses decreased $7.1 million and $3.9 million to $2.2 million and $7.9 million for the three and six months ended June 30, 2019 compared to $9.3 million and $11.8 million for the same periods in 2018.

The decrease in the provision for loan losses was mainly due to lower net charge-offs for both periods. For the three and six months ended June 30, 2019, we had net charges-offs of $2.1 million and $7.4 million compared to $7.9 million and $7.7 million for the same periods in 2018. Net charge-offs for the three months ended June 30, 2018 was significantly impacted by a $5.2 million loan charge-off for a commercial customer arising from a participation loan agreement with a lead bank and other participating banks. The loss resulted from fraudulent activities believed to be perpetrated by one or more executives employed by the borrower and its related entities. Annualized net loan charge-offs to average loans for the three and six months ended June 30, 2019 were 0.14 percent and 0.25 percent compared to 0.55 percent and 0.27 percent for the same periods in 2018.

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

Impaired loans increased $17.5 million to $51.3 million at June 30, 2019 compared to $33.8 million at June 30, 2018 and specific reserves on impaired loans increased $2.2 million compared to the same period in the prior year. The increase in specific reserves related to a $7.7 million commercial real estate loan that had a specific reserve of $1.3 million recorded in the fourth quarter of 2018. Nonperforming loans also increased $23.6 million to $45.0 million at June 30, 2019 compared to $21.4 million at June 30, 2018.

The ALL at June 30, 2019 was $61.5 million compared to $60.5 million at June 30, 2018. The ALL as a percent of total portfolio loans was 1.02 percent at June 30, 2019 and 1.05 percent at June 30, 2018. Refer to “Financial Condition as of June 30, 2019 - Allowance for Loan Losses” in this MD&A for additional information.

Noninterest Income

(dollars in thousands)	Three Months Ended June 30, — 2019	2018	$ Change	% Change		2019	2018	$ Change		% Change
Net gain on sale of securities	$ —	$ —	$ —		NM		$ —	$ —	$ —		NM
Debit and credit card	3,501	3,309	192		5.8		6,476	6,347	129		2.0	%
Service charges on deposit accounts	3,212	3,227	(15	)	(0.5	)	6,365	6,468	(103	)	(1.6	)
Wealth management	2,062	2,616	(554	)	(21.2	)	4,109	5,298	(1,189	)	(22.4	)
Mortgage banking	637	831	(194	)	(23.3	)	1,131	1,432	(301	)	(21.0	)
Gain on sale of a majority interest of insurance business	—	—	—		NM		—	1,873	(1,873	)	NM
Other	3,489	2,268	1,221		53.8		6,182	4,626	1,556		33.6
Total Noninterest Income	$ 12,901	$ 12,251	$ 650		5.3	%	$ 24,263	$ 26,044	$ (1,781	)	(6.8	)%

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

Noninterest Expense

(dollars in thousands)	Three Months Ended June 30, — 2019	2018	$ Change	% Change		2019	2018	$ Change		% Change
Salaries and employee benefits	$ 20,290	$ 18,611	$ 1,679		9.0	%	$ 41,199	$ 37,426	$ 3,773		10.1	%
Data processing and information technology	3,414	2,379	1,035		43.5		6,646	4,704	1,942		41.3
Net occupancy	2,949	2,804	145		5.2		5,986	5,677	309		5.4
Furniture, equipment and software	2,301	2,134	167		7.8		4,531	4,090	441		10.8
Other taxes	1,456	1,739	(283	)	(16.3	)	2,641	3,587	(946	)	(26.4	)
Marketing	1,310	1,190	120		10.1		2,452	1,892	560		29.6
Professional services and legal (1)	1,145	888	257		28.9		2,329	1,939	390		20.1
FDIC insurance	695	739	(44	)	(6.0	)	1,211	1,847	(636	)	(34.5	)
Merger related expenses	618	—	618		NM		618	—	618		NM
Other	6,174	5,379	795		14.8		11,658	10,783	875		8.1
Total Noninterest Expense	$ 40,352	$ 35,863	$ 4,489		12.5	%	$ 79,271	$ 71,945	$ 7,326		10.2	%

(1) Excludes Merger related expenses for 2019 amounts only.

NM - not meaningful

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S&T BANCORP, INC. AND SUBSIDIARIES

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

Noninterest expense increased $4.5 million to $40.4 million for the three months ended June 30, 2019 and $7.3 million to $79.3 million for the six months ended June 30, 2019 compared to the same periods in 2018. During the second quarter of 2019, we incurred merger related expenses of $0.6 million for professional services in the three and six months ended June 30, 2019. Salaries and employee benefits expense increased $1.7 million for the three months ended and $3.8 million for the six months ended June 30, 2019 compared to the same periods in 2018 mainly due to annual merit increases and higher severance, higher incentives and higher pension costs. Data processing and information technology increased $1.0 million for the three months ended and $1.9 million for the six months ended June 30, 2019 compared to the same periods in 2018 due the recent outsourcing arrangement for certain components of our IT function and the annual increase with our third-party data processor. Other noninterest expense increased $0.8 million for the three months ended and $0.9 million for the six months ended June 30, 2019 compared to the same periods in 2018 due to higher loan related expenses and other real estate owned, or OREO, losses and expenses. These increases were partially offset by a decrease in other taxes of $0.3 million for the three months ended and $0.9 million for the six months ended June 30, 2018 due to a state sales tax assessment in 2018. FDIC insurance remained relatively unchanged for the three months ended but decreased $0.6 million for the six months ended June 30, 2019 compared to the same periods in 2018 due to improvements in the financial ratios used to determine the assessment.

Provision for Income Taxes

Financial Condition as of June 30, 2019

Total assets were relatively unchanged at $7.3 billion at June 30, 2019 compared to December 31, 2018. Total portfolio loans increased $86.6 million with increases primarily in the commercial loan portfolio. The Commercial and Industrial and Commercial Construction loans increased $66.3 million and $10.0 million offset by a decrease of $14.9 million in CRE loans. Consumer loans increased $25.2 million primarily as a result of the $24.7 million increase in residential mortgages and minor increases in all other consumer categories except the home equity portfolio. Securities decreased $16.3 million to $668.6 million at June 30, 2019 from $684.9 million at December 31, 2018. The decrease in securities is due to pay downs on mortgage-backed securities offset by limited purchases and an increase in the unrealized gain during the six months ended June 30, 2019. The bond portfolio had an unrealized gain of $11.3 million at June 30, 2019 compared to an unrealized loss of $5.1 million at December 31, 2018 due to a decrease in interest rates.

Our deposits increased $182.8 million, or 3.2 percent, with total deposits of $5.9 billion at June 30, 2019 compared to $5.7 billion at December 31, 2018. Customer deposits increased $291.5 million with growth in money market of $267.9 million, or 22.7 percent, in noninterest-bearing demand accounts of $41.2 million and certificates of deposit of $36.5 million which was offset by declines in savings accounts of $30.9 million and interest-bearing demand accounts of $23.2 million. The significant increase of $267.9 million in money market deposits is related to a competitively-priced indexed product and a promotional rate product offered in selected markets. Total brokered deposits decreased $108.7 million at June 30, 2019 compared to December 31, 2018.

Total borrowings decreased $179.7 million compared to December 31, 2018 due to a decrease in funding needs. Total short-term borrowings decreased by $179.2 million, or 36.7 percent, and long-term borrowings decreased $0.5 million.

Total shareholders’ equity increased by $29.2 million to $965.0 million at June 30, 2019 compared to $935.8 million at December 31, 2018. The increase was primarily due to net income of $49.0 million offset partially by dividends of $18.6 million and share repurchases of $15.1 million. The $13.6 million increase in other comprehensive income was due to a $12.9 million increase in unrealized gains on our available-for-sale investment securities and a $0.7 million change in the funded status of our employee benefit plans.

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S&T BANCORP, INC. AND SUBSIDIARIES

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

Securities Activity

(dollars in thousands) — U.S. treasury securities	$ 10,007	$ 9,736	$ 271
Obligations of U.S. government corporations and agencies	129,773	128,261	1,512
Collateralized mortgage obligations of U.S. government corporations and agencies	150,405	148,659	1,746
Residential mortgage-backed securities of U.S. government corporations and agencies	20,936	24,350	(3,414	)
Commercial mortgage-backed securities of U.S. government corporations and agencies	235,292	246,784	(11,492	)
Obligations of states and political subdivisions	117,624	122,266	(4,642	)
Debt Securities Available-for-Sale	664,037	680,056	(16,019	)
Marketable equity securities	4,551	4,816	(265	)
Total Securities	$ 668,588	$ 684,872	$ (16,284	)

We invest in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income, and as a tool of ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to an investment policy approved annually by our Board of Directors and administered through ALCO and our treasury function. Securities decreased $16.3 million to $668.6 million at June 30, 2019 from $684.9 million at December 31, 2018. The decrease in securities is due to pay downs on mortgage-backed securities offset by limited purchases and an increase in the unrealized gain during the six months ended June 30, 2019.

At June 30, 2019 our bond portfolio was in a net unrealized gain position of $11.3 million compared to a net unrealized loss position of $5.1 million at December 31, 2018. At June 30, 2019 total gross unrealized gains in the bond portfolio were $11.8 million offset by $0.5 million of gross unrealized losses, compared to December 31, 2018, when total gross unrealized gains were $3.5 million offset by gross unrealized losses of $8.6 million. Management evaluates the securities portfolio for other than temporary impairment, or OTTI, on a quarterly basis. During the six months ended June 30, 2019 and 2018, we did not record any OTTI.

Loan Composition

(dollars in thousands)	June 30, 2019 — Amount	% of Loans	December 31, 2018 — Amount	% of Loans
Commercial
Commercial real estate	$ 2,906,895	48.18 %	$ 2,921,832	49.13 %
Commercial and industrial	1,559,727	25.85	1,493,416	25.11
Construction	267,203	4.43	257,197	4.33
Total Commercial Loans	4,733,825	78.46 %	4,672,445	78.57 %
Consumer
Residential mortgage	751,355	12.45 %	726,679	12.22 %
Home equity	464,195	7.69	471,562	7.93
Installment and other consumer	72,041	1.19	67,546	1.13
Construction	11,784	0.20	8,416	0.14
Total Consumer Loans	1,299,375	21.54 %	1,274,203	21.43 %
Total Portfolio Loans	6,033,200	100.00 %	5,946,648	100.00 %
Loans held for sale	8,135		2,371
Total Loans	$ 6,041,335		$ 5,949,019

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

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

Commercial loans, including CRE, C&I and Commercial Construction, comprised 78.5 percent of total portfolio loans at June 30, 2019 and 78.6 percent at December 31, 2018. Total portfolio loans increased $86.6 million to $6.0 billion at June 30, 2019 compared to $5.9 billion at December 31, 2018. The increase was primarily due to $61.4 million in our commercial loan portfolio. C&I portfolio increased $66.3 million and Commercial Construction loans increased $10.0 million offset by a decrease of $14.9 million in the CRE portfolio compared to December 31, 2018.

Consumer loans represent 21.5 percent of our total portfolio loans at June 30, 2019 and 21.4 percent at December 31, 2018. Consumer loans increased $25.2 million compared to December 31, 2018 with minor increases in all categories except the home equity portfolio. Residential mortgages increased $24.7 million, installment and other consumer increased $4.5 million and consumer construction loans increased $3.4 million offset by a decrease of $7.4 million in home equity loans.

Allowance for Loan Losses

We maintain an ALL at a level determined to be adequate to absorb estimated probable credit losses inherent within the loan portfolio as of the balance sheet date, and it is presented as a reserve against loans in the Consolidated Balance Sheets. Determination of an adequate ALL is inherently subjective and may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: evaluation and impairment tests of individual loans and evaluation and impairment tests of certain groups of homogeneous loans with similar risk characteristics.

An inherent risk to the loan portfolio as a whole is the condition of the economy in our markets. In addition, each loan segment carries with it risks specific to the segment. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.

The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ALL.

CRE loans are secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner-occupied.

C&I loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

Commercial Construction loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

Consumer Real Estate loans are secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing markets can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

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

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S&T BANCORP, INC. AND SUBSIDIARIES

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

The following tables summarize the ALL and recorded investments in loans by category and the related ratios for the dates presented:

	June 30, 2019
	Allowance for Loan Losses			Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total
Commercial real estate	$ 1,530	$ 31,306	$ 32,836	$ 29,295	$ 2,877,600	$ 2,906,895
Commercial and industrial	204	13,023	13,227	10,651	1,549,076	1,559,727
Commercial construction	157	7,097	7,254	2,808	264,395	267,203
Consumer real estate	307	6,264	6,571	8,529	1,218,805	1,227,334
Other consumer	14	1,577	1,591	16	72,025	72,041
Total	$ 2,212	$ 59,267	$ 61,479	$ 51,299	$ 5,981,901	$ 6,033,200

	December 31, 2018
	Allowance for Loan Losses			Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total	Individually Evaluated for Impairment	Collectively Evaluated for Impairment	Total
Commercial real estate	$ 1,295	$ 32,412	$ 33,707	$ 11,369	$ 2,910,463	$ 2,921,832
Commercial and industrial	360	11,236	11,596	13,672	1,479,744	1,493,416
Commercial construction	87	7,896	7,983	15,775	241,422	257,197
Consumer real estate	10	6,177	6,187	8,674	1,197,983	1,206,657
Other consumer	11	1,512	1,523	16	67,530	67,546
Total	$ 1,763	$ 59,233	$ 60,996	$ 49,506	$ 5,897,142	$ 5,946,648

Ratio of net charge-offs to average loans outstanding	June 30, 2019 — 0.25 %	December 31, 2018 — 0.18 %
Allowance for loan losses as a percentage of total loans	1.02 %	1.03 %
Allowance for loan losses to nonperforming loans	137 %	144 %

*** Annualized

The ALL was $61.5 million, or 1.02 percent of total portfolio loans, at June 30, 2019 compared to $61.0 million, or 1.03 percent of total portfolio loans at December 31, 2018. The minor increase in the ALL of $0.5 million was primarily due to a $0.4 million increase in the reserve for loans individually evaluated for impairment compared to December 31, 2018. Impaired loans increased $1.8 million to $51.3 million compared to $49.5 million at December 31, 2018. Commercial special mention, substandard and doubtful loans decreased $24.9 million to $243.6 million from $268.5 million at December 31, 2018. Substandard loans decreased $43.3 million and special mention increased $18.4 million. The decrease in substandard loans from December 31, 2018 was mainly due to pay-offs and loan risk rating upgrades. Special mention loans increased due to downgrades as a result of updated financial information.

For the three and six months ended June 30, 2019, we had net charges-offs of $2.1 million and $7.4 million compared to $7.9 million and $7.7 million for the same periods in 2018. The provision for loan losses decreased $7.1 million and $3.9 million to $2.2 million and $7.9 million for the three and six months ended June 30, 2019 compared to $9.3 million and $11.8 million for the same periods in 2018. The decrease in the provision for loan losses was mainly due to lower net charge-offs for both periods.

We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Our methodology for evaluating whether a loan is impaired includes risk-rating credits on an individual basis and consideration of the borrower’s overall financial condition, payment history and available cash resources. In measuring impairment, we primarily utilize fair market value of the collateral; however, we also use discounted cash flow when warranted.

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S&T BANCORP, INC. AND SUBSIDIARIES

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

Troubled debt restructurings, or TDRs, whether on accrual or nonaccrual status, are also classified as impaired loans. TDRs are loans where we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. We strive to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 bankruptcy and not reaffirmed by the borrower as TDRs.

An accruing loan that is modified into a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before the modification. All TDRs are considered to be impaired loans and will be reported as impaired loans for their remaining lives, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and we fully expect that the remaining principal and interest will be collected according to the restructured agreement. For all TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate. Further, all impaired loans are reported as nonaccrual loans unless the loan is a TDR that has met the requirements to be returned to accruing status. TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.

As an example, consider a substandard Commercial Construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time. The post-modification interest rate given to the borrower is considered to be lower than the current market rate for new debt with similar risk and all other terms remain the same according to the original loan agreement. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted due to the long extension, resulting in payment delay as well as the rate being lower than current market rate for new debt with similar risk. The loan will be reported as a nonaccrual TDR and an impaired loan. In addition, the loan could be charged down to the fair value of the collateral if a confirmed loss exists. If the loan subsequently performs, by means of making on-time principal and interest payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR. The loan will remain an impaired loan for the remaining life of the loan because the interest rate was not adjusted to be equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk.

TDRs increased $2.7million to $30.6 million at June 30, 2019 compared to $27.9 million at December 31, 2018. The increase is primarily due to new TDRs totaling $11.2 million in 2019, which were offset by principal reductions and charge-offs. Total TDRs of $30.6 million at June 30, 2019 included $20.7 million, or 67.5 percent, that were accruing and $9.9 million, or 32.5 percent, that were nonaccruing.

Our charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss becomes probable, regardless of the delinquency status of the loan. We may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to:

• the status of a bankruptcy proceeding;

• the value of collateral and probability of successful liquidation; and/or

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

Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.

Our allowance for lending-related commitments is determined using a methodology similar to that used for the ALL. Amounts are added to the allowance for lending-related commitments by a charge to current earnings through noninterest expense. The reserve is calculated by applying historical loss rates to unfunded commitments and considering qualitative factors. The allowance for unfunded loan commitments was $2.3 million at June 30, 2019 and $2.2 million at December 31, 2018. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.

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S&T BANCORP, INC. AND SUBSIDIARIES

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

Nonperforming assets consist of nonaccrual loans, nonaccrual TDRs and OREO. The following table summarizes nonperforming assets for the dates presented:

(dollars in thousands)
Nonperforming Loans
Commercial real estate	$ 23,184	$ 10,913	$ 12,271
Commercial and industrial	3,150	2,314	836
Commercial construction	820	13,787	(12,967	)
Residential mortgage	5,285	5,585	(300	)
Home equity	2,623	2,349	274
Installment and other consumer	22	37	(15	)
Total Nonperforming Loans	35,083	34,985	98
Nonperforming Troubled Debt Restructurings
Commercial real estate	5,600	1,139	4,461
Commercial and industrial	980	6,646	(5,666	)
Commercial construction	406	406	—
Residential mortgage	1,497	1,543	(46	)
Home equity	1,458	1,349	109
Installment and other consumer	3	5	(2	)
Total Nonperforming Troubled Debt Restructurings	9,944	11,088	(1,145	)
Total Nonperforming Loans	45,027	46,073	(1,046	)
OREO	1,495	3,092	(1,597	)
Total Nonperforming Assets	$ 46,522	$ 49,165	$ (2,643	)
Asset Quality Ratios:
Nonperforming loans as a percent of total loans	0.75 %	0.77 %
Nonperforming assets as a percent of total loans plus OREO	0.77 %	0.83 %

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due.

Nonperforming loans decreased $1.1 million to $45.0 million at June 30, 2019 compared to $46.1 million at

December 31, 2018.

Deposits

(dollars in thousands)
Customer Deposits
Noninterest-bearing demand	$ 1,462,386	$ 1,421,156	$ 41,230
Interest-bearing demand	544,265	567,492	(23,227	)
Money market	1,446,086	1,178,211	267,875
Savings	754,062	784,970	(30,908	)
Certificates of deposit	1,298,255	1,261,704	36,551
Total Customer Deposits	5,505,054	5,213,533	291,521
Brokered Deposits
Interest-bearing demand	5,398	6,201	(803	)
Money market	296,248	303,854	(7,606	)
Certificates of deposit	50,000	150,334	(100,334	)
Total Brokered Deposits	351,646	460,389	(108,743	)
Total Deposits	$ 5,856,700	$ 5,673,922	$ 182,778

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S&T BANCORP, INC. AND SUBSIDIARIES

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

Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new deposits. Total deposits at June 30, 2019 increased $182.8 million from December 31, 2018. Total customer deposits increased $291.5 million from December 31, 2018. Money market deposits primarily accounted for this change with an increase of $267.9 million, noninterest-bearing demand deposits increased $41.2 million and certificate of deposits increased $36.5 million. The significant increase in money market deposits is related to a competitively-priced indexed product and a promotional rate product offered in selected markets. These increases were offset by declines in savings deposits of $30.9 million and interest-bearing demand deposits of $23.2 million. These decreases were mainly a result of migration into the indexed money market product and outflows due to repositioning by our customers. Total brokered deposits decreased $108.7 million from December 31, 2018. Brokered deposits are an additional source of funds utilized by ALCO as a way to diversify funding sources, as well as manage our funding costs and structure.

Borrowings

(dollars in thousands) — Securities sold under repurchase agreements	$ 14,154	$ 18,383	$ (4,229	)
Short-term borrowings	295,000	470,000	(175,000	)
Long-term borrowings	69,791	70,314	(523	)
Junior subordinated debt securities	45,619	45,619	—
Total Borrowings	$ 424,564	$ 604,316	$ (179,752	)

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

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S&T BANCORP, INC. AND SUBSIDIARIES

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

Information pertaining to short-term borrowings is summarized in the tables below for the six and twelve months ended June 30, 2019 and December 31, 2018.

(dollars in thousands)	Securities Sold Under Repurchase Agreements — June 30, 2019	December 31, 2018
Balance at the period end	$ 14,154	$ 18,383
Average balance during the period	19,735	45,992
Average interest rate during the period	0.59 %	0.48 %
Maximum month-end balance during the period	$ 23,427	$ 54,579
Average interest rate at the period end	0.74 %	0.46 %
	Short-Term Borrowings
(dollars in thousands)	June 30, 2019	December 31, 2018
Balance at the period end	$ 295,000	$ 470,000
Average balance during the period	280,862	525,172
Average interest rate during the period	2.72 %	2.11 %
Maximum month-end balance during the period	$ 425,000	$ 690,000
Average interest rate at the period end	2.71 %	2.65 %

Information pertaining to long-term borrowings is summarized in the tables below for the six and twelve months ended June 30, 2019 and December 31, 2018.

(dollars in thousands)	Long-Term Borrowings — June 30, 2019	December 31, 2018
Balance at the period end	$ 69,791	$ 70,314
Average balance during the period	70,122	47,986
Average interest rate during the period	2.85 %	2.35 %
Maximum month-end balance during the period	$ 70,418	$ 70,314
Average interest rate at the period end	2.73 %	2.84 %
	Junior Subordinated Debt Securities
(dollars in thousands)	June 30, 2019	December 31, 2018
Balance at the period end	$ 45,619	$ 45,619
Average balance during the period	45,619	45,619
Average interest rate during the period	5.03 %	4.60 %
Maximum month-end balance during the period	$ 45,619	$ 45,619
Average interest rate at the period end	5.07 %	5.25 %

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S&T BANCORP, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

L iquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or of borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk our Board of Directors has delegated authority to ALCO for formulation, implementation, and oversight of liquidity risk management for S&T. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests, and having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.

Our primary funding and liquidity source is a stable customer deposit base. We believe S&T has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile sources. Refer to the "Financial Condition- Deposits" section of this MD&A, for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to S&T include borrowing availability at the FHLB of Pittsburgh, federal funds lines with other financial institutions, the brokered deposit market, and borrowing availability through the Federal Reserve Borrower-In-Custody program.

An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate, and high. At June 30, 2019, we had $532.7 million in highly liquid assets, which consisted of $61.8 million in interest-bearing deposits with banks, $462.8 million in unpledged securities and $8.1 million in loans held for sale. This resulted in a highly liquid assets to total assets ratio of 7.3 percent at June 30, 2019. Also, at June 30, 2019, we had a remaining borrowing availability of $2.0 billion with the FHLB of Pittsburgh. Refer to Note 9: Borrowings in the Notes to Consolidated Financial Statements and the "Financial Condition- Borrowings" section of this MD&A for more details.

The following table summarizes capital amounts and ratios for S&T and S&T Bank for the dates presented:

(dollars in thousands)	Adequately Capitalized	Well- Capitalized	June 30, 2019		December 31, 2018
			Amount	Ratio	Amount	Ratio
S&T Bancorp, Inc.
Tier 1 leverage	4.00 %	5.00 %	$ 705,600	10.12 %	$ 689,778	10.05 %
Common equity tier 1 to risk-weighted assets	4.50 %	6.50 %	685,600	11.35 %	669,778	11.38 %
Tier 1 capital to risk-weighted assets	6.00 %	8.00 %	705,600	11.68 %	689,778	11.72 %
Total capital to risk-weighted assets	8.00 %	10.00 %	794,426	13.15 %	777,913	13.21 %
S&T Bank
Tier 1 leverage	4.00 %	5.00 %	$ 675,236	9.71 %	$ 659,304	9.63 %
Common equity tier 1 to risk-weighted assets	4.50 %	6.50 %	675,236	11.20 %	659,304	11.23 %
Tier 1 capital to risk-weighted assets	6.00 %	8.00 %	675,236	11.20 %	659,304	11.23 %
Total capital to risk-weighted assets	8.00 %	10.00 %	764,061	12.68 %	747,438	12.73 %

We have filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, with the SEC, which allows for the issuance of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to subsidiaries, possible acquisitions and stock repurchases. As of June 30, 2019, we had not issued any securities pursuant to this shelf registration statement.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or capital. For most financial institutions, including S&T, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes also affect capital by changing the net present value of a bank’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancing shareholder value. However, excessive interest rate risk can threaten a bank’s earnings, capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by ALCO. ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analyses and by performing stress tests and simulations in order to mitigate earnings and market value fluctuations due to changes in interest rates.

Rate shock analyses results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 and 24 months of pretax net interest income. The base case and rate shock analyses are performed on a static balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of loans and securities with optionality. S&T policy guidelines limit the change in pretax net interest income over 12 and 24 month horizons using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in pretax net interest income by graduated risk tolerance levels of minimal, moderate and high. We have temporarily suspended the analyses on downward rate shocks of 300 basis points or more because they do not provide meaningful insight into our interest rate risk position.

In order to monitor interest rate risk beyond the 24 month time horizon of rate shocks on pretax net interest income, we also perform EVE analyses. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analyses on pretax net interest income, EVE analyses incorporate management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit products. S&T policy guidelines limit the change in EVE using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in EVE by graduated risk tolerance levels of minimal, moderate and high. We have also temporarily suspended the downward rate shocks of 300 basis points or more for EVE.

The table below reflects the rate shock analyses results for the 1 - 12 and 13 - 24 month periods of pretax net interest income and EVE. All results are in the minimal risk tolerance level.

	June 30, 2019 — 1 - 12 Months		13 - 24 Months		% Change in EVE		December 31, 2018 — 1 - 12 Months		13 - 24 Months		% Change in EVE
Change in Interest Rate ( basis points )	% Change in Pretax Net Interest Income		% Change in Pretax Net Interest Income				% Change in Pretax Net Interest Income		% Change in Pretax Net Interest Income
400	11.9	%	13.3	%	(0.3	)%	8.3	%	11.6	%	(10.0	)%
300	8.9		9.8		4.0		6.1		8.5		(4.6	)
200	6.0		6.6		6.1		4.0		5.6		0.6
100	3.2		3.7		5.4		2.2		3.1		1.4
(100)	(4.7	)	(5.7	)	(11.3	)	(3.8	)	(5.4	)	(7.5	)
(200)	(9.3	)	(11.5	)	(25.4	)	(7.8	)	(11.2	)	(16.8	)

The results from the rate shock analyses on net interest income are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive balance sheet will differ depending upon the change in market interest rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in net interest income and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in net interest income and operating income.

Our rate shock analyses show an improvement in the percentage change in pretax net interest income in the rates up scenarios and a decline in the rates down scenarios in months 1 - 12 and 13 - 24 when comparing December 31, 2018 to June 30, 2019. Our EVE analyses show an improvement in the percentage change in EVE in the rates up scenarios and a decline in the rates down scenario when comparing December 31, 2018 to June 30, 2019.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to rate shocks and EVE analyses, we perform a market risk stress test at least annually. The market risk stress test includes sensitivity analyses and simulations. Sensitivity analyses are performed to help us identify which model assumptions cause the greatest impact on pretax net interest income. Sensitivity analyses may include changing prepayment behavior of loans and securities with optionality and the impact of interest rate changes on non-maturity deposit products. Simulation analyses may include the potential impact of rate changes other than the policy guidelines, yield curve shape changes, significant balance mix changes and various growth scenarios.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of S&T’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of June 30, 2019. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to S&T’s management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material respects, as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2019, there were no changes made to S&T’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, S&T’s internal control over financial reporting.

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S&T BANCORP, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There have been no material changes to the risk factors that we have previously disclosed in Part I, Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 21, 2019 other than the risks described below related to the pending merger with DNB.

The market price of S&T common stock after the merger may be affected by factors different from those affecting the shares of S&T currently.

Upon completion of the merger, holders of DNB common stock will become holders of S&T common stock. S&T’s business differs in important respects from that of DNB, and, accordingly, the results of operations of the combined company and the market price of S&T common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of S&T.

Approvals required to complete the merger may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.

Before the merger and the bank merger may be completed, S&T and DNB must obtain approvals from the Federal Reserve Board, the FDIC and the Pennsylvania Department of Banking and Securities, as well as from the shareholders of DNB. Other approvals, waivers or consents from regulators may also be required. If these approvals are not obtained or waived, to the extent permitted by law or stock exchange rules, the merger may not occur or may be delayed. Additionally, regulators may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have an adverse effect on the combined company following the merger.

Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.

S&T and DNB have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on S&T’s ability to successfully combine the businesses of S&T and DNB. To realize these anticipated benefits and cost savings, after the completion of the merger, S&T expects to integrate DNB’s business into its own.

It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect S&T’s ability to successfully conduct its business in the markets in which DNB now operates, which could have an adverse effect on S&T’s financial results and the value of its common stock. If S&T experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected.

As with any merger of financial institutions, there also may be business disruptions that cause S&T and/or DNB to lose customers or cause customers to remove their accounts from S&T and/or DNB and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of S&T and DNB during this transition period and for an undetermined period after completion of the merger on the combined company. In addition, the actual cost savings of the merger could be less than anticipated.

Termination of the merger agreement could negatively impact S&T.

There may be various negative consequences if the merger agreement is terminated. For example, S&T’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is

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S&T BANCORP, INC. AND SUBSIDIARIES

terminated, the market price of S&T’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed.

Failure to complete the merger could negatively impact the stock price and the future business and financial results of S&T.

If the merger is not completed for any reason, including as a result of DNB shareholders declining to approve the merger agreement and the transactions contemplated by the merger agreement, the ongoing business of S&T may be adversely affected and, without realizing any of the benefits of having completed the merger, S&T would be subject to a number of risks, including the following:

• S&T may experience negative reactions from the financial markets, including negative impacts on its stock price;

• S&T may experience negative reactions from its customers, vendors and employees;

• The merger agreement places certain restrictions on the conduct of S&T’s business prior to completion of the merger, such restrictions, the waiver of which is subject to the consent of DNB (not to be unreasonably withheld or delayed) may prevent S&T from taking certain specified actions during the pendency of the merger; and

• Matters relating to the merger (including integration planning) will require substantial commitments of time and resources by S&T management, which would otherwise have been devoted to other opportunities that may have been beneficial to S&T as an independent company.

If the merger is not completed, S&T will have incurred substantial expenses without realizing the expected benefits of the merger.

S&T has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, S&T would have to recognize these and other expenses without realizing the expected benefits of the merger.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

The following table is a summary of our purchases of common stock during the second quarter of 2019:

Period	Total number of shares purchased	Average price paid per share	Total number of shares purchased as part of publicly announced plan (1)	Approximate dollar value of shares that may yet be purchased under the plan
				$25,456,631
04/01/2019 - 04/30/2019	71,936	$39.41	71,936	22,621,633
05/01/2019 - 05/31/2019	—	—	—	22,621,633
06/01/2019 - 06/30/2019	—	—	—	22,621,633
Total	71,936	$39.41	71,936	$22,621,633

(1) On March 19, 2018, our Board of Directors authorized a $50 million share repurchase plan. This repurchase authorization, which is effective through August 31, 2019, permits us to repurchase from time to time up to $50 million in aggregate value of shares of our common stock through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at our discretion and will depend on a variety of factors, including general market conditions, the trading price of the common stock, legal and contractual requirements and our financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. We expect to fund any repurchases from cash on hand and internally generated funds. As of June 30, 2019, there were 707,571 common shares repurchased under this plan at a total cost of $27.4 million, or an average of $38.69 per share. Up to an additional $22.6 million of our common stock may be repurchased under this plan through August 31, 2019.

Item 3. Defaults Upon Senior Securities

None

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S&T BANCORP, INC. AND SUBSIDIARIES

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits

2.1	Agreement and Plan of Merger, dated as of June 5, 2019, by and between DNB Financial Corporation and S&T Bancorp, Inc. Filed as Exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on June 4, 2019, and incorporated herein by reference.
10.1	Severance Agreement, by and between David G. Antolik and S&T Bancorp, Inc., dated May 17, 2019.	Filed herewith
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.	Filed herewith
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.	Filed herewith
32	Rule 13a-14(b) Certification of the Chief Executive Officer and Chief Financial Officer.	Filed herewith
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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S&T BANCORP, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	S&T Bancorp, Inc. (Registrant)
July 31, 2019	/s Mark Kochvar
	Mark Kochvar Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Signatory)

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