ALLOWANCE FOR LOAN LOSSES

We maintain an ALL at a level determined to be appropriate 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) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.

The following are key risks within each portfolio segment:

CRE—Loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Operations of the individual projects 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 and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

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

The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is the 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, or LBP, which represents the historical data period utilized to calculate loss rates.

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

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



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



	December 31, 2017
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		Non- performing		Total Past Due Loans		Total Loans
Commercial real estate	$	2,681,395	$	997	$	134	$	3,468	$	4,599	$	2,685,994
Commercial and industrial	1,426,754		420		446		5,646		6,512		1,433,266
Commercial construction	377,968		2,473		20		3,873		6,366		384,334
Residential mortgage	687,195		2,975		1,439		7,165		11,579		698,774
Home equity	480,956		2,065		590		3,715		6,370		487,326
Installment and other consumer	66,770		193		170		71		434		67,204
Consumer construction	4,551		—		—		—		—		4,551
Loans held for sale	4,485		—		—		—		—		4,485
Total	$	5,730,074	$	9,123	$	2,799	$	23,938	$	35,860	$	5,765,934

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

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

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

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

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

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



	December 31, 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	%



	December 31, 2017
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	2,588,847	96.4	%	$	1,345,810	93.9	%	$	368,105	95.8	%	$	4,302,762	95.5	%
Special mention	66,436		2.5	%	54,320		3.8	%	9,345		2.4	%	130,101		2.9	%
Substandard	30,711		1.1	%	33,136		2.3	%	6,884		1.8	%	70,731		1.6	%
Total	$	2,685,994	100.0	%	$	1,433,266	100.0	%	$	384,334	100.0	%	$	4,503,594	100.0	%

Commercial substandard loans increased $110.5 million from December 31, 2017 mainly due to the receipt of updated financial information from the borrowers that resulted in the loans being downgraded.

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

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



	December 31, 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	%



	December 31, 2017
(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	$	691,609	99.0	%	$	483,611	99.2	%	$	67,133	99.9	%	$	4,551	100.0	%	$	1,246,904	99.1	%
Nonperforming	7,165		1.0	%	3,715		0.8	%	71		0.1	%	—		—	%	10,951		0.9	%
Total	$	698,774	100.0	%	$	487,326	100.0	%	$	67,204	100.0	%	$	4,551	100.0	%	$	1,257,855	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 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:



	December 31, 2018						December 31, 2017
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With a related allowance recorded:
Commercial real estate	$	7,733	$	7,733	$	1,295	$	—	$	—	$	—
Commercial and industrial	884		893		360		1,735		1,787		29
Commercial construction	489		489		87		—		—		—
Consumer real estate	15		14		10		21		21		21
Other consumer	11		12		11		27		27		27
Total with a Related Allowance Recorded	9,132		9,141		1,763		1,783		1,835		77
Without a related allowance recorded:
Commercial real estate	3,636		4,046		—		3,546		3,811		—
Commercial and industrial	12,788		14,452		—		5,549		7,980		—
Commercial construction	15,286		19,198		—		5,464		8,132		—
Consumer real estate	8,659		9,635		—		10,467		11,357		—
Other consumer	5		18		—		14		22		—
Total without a Related Allowance Recorded	40,374		47,349		—		25,040		31,302		—
Total:
Commercial real estate	11,369		11,779		1,295		3,546		3,811		—
Commercial and industrial	13,672		15,345		360		7,284		9,767		29
Commercial construction	15,775		19,687		87		5,464		8,132		—
Consumer real estate	8,674		9,649		10		10,488		11,378		21
Other consumer	16		30		11		41		49		27
Total	$	49,506	$	56,490	$	1,763	$	26,823	$	33,137	$	77

The following table summarizes average recorded investment in and interest income recognized on loans considered to be impaired for the years presented:



	For the Year Ended
	December 31, 2018				December 31, 2017
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:
Commercial real estate	$	7,780	$	238	$	—	$	—
Commercial and industrial	591		38		968		52
Commercial construction	561		—		—		—
Consumer real estate	16		1		23		2
Other consumer	19		1		34		2
Total with a Related Allowance Recorded	8,967		278		1,025		56
Without a related allowance recorded:
Commercial real estate	3,911		172		6,636		177
Commercial and industrial	4,722		257		9,897		257
Commercial construction	17,643		217		6,828		253
Consumer real estate	9,701		483		11,037		487
Other consumer	24		—		23		—
Total without a Related Allowance Recorded	36,001		1,129		34,421		1,174
Total:
Commercial real estate	11,691		410		6,636		177
Commercial and industrial	5,313		295		10,865		309
Commercial construction	18,204		217		6,828		253
Consumer real estate	9,717		484		11,060		489
Other consumer	43		1		57		2
Total	$	44,968	$	1,407	$	35,446	$	1,230

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



	2018
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of year	$	27,235		$	8,966		$	13,167		$	5,479		$	1,543		$	56,390
Charge-offs	(372		)	(8,574		)	(2,630		)	(1,319		)	(1,694		)	(14,589		)
Recoveries	309			1,723			1,135			541			492			4,200
Net (Charge-offs) Recoveries	(63		)	(6,851		)	(1,495		)	(778		)	(1,202		)	(10,389		)
Provision for loan losses	6,535			9,481			(3,689		)	1,486			1,182			14,995
Balance at End of Year	$	33,707		$	11,596		$	7,983		$	6,187		$	1,523		$	60,996



	2017
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of year	$	19,976		$	10,810		$	13,999		$	6,095		$	1,895		$	52,775
Charge-offs	(2,304		)	(4,709		)	(2,571		)	(2,274		)	(1,638		)	(13,496		)
Recoveries	810			654			851			342			571			3,228
Net Recoveries (Charge-offs)	(1,494		)	(4,055		)	(1,720		)	(1,932		)	(1,067		)	(10,268		)
Provision for loan losses	8,753			2,211			888			1,316			715			13,883
Balance at End of Year	$	27,235		$	8,966		$	13,167		$	5,479		$	1,543		$	56,390

Net charge-offs and provision for loan losses for the year ended December 31, 2018 was significantly impacted by two larger charges, a $5.2 million loan charge-off in the second quarter of 2018 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. S&T's total exposure consisted of the the participation loan of $4.9 million and a direct exposure of $950 thousand which is secured by vehicles and equipment liens. During the third quarter of 2018, we received a $0.1 million recovery on this relationship and did not incur any further charge-offs. The second charge-off of $2.4 million was recorded during the fourth quarter of 2018, a commercial construction loan for senior housing apartments with residual loan exposure of $11.5 million.

Loans acquired in the Merger were recorded at fair value with no carryover of the related allowance for loan losses from Integrity. As of December 31, 2018, acquired loans from the Merger of $312.3 million were outstanding, which decreased from $386.6 million at December 31, 2017. Additional credit deterioration on acquired loans during 2017 in excess of the original credit discount embedded in the fair value determination on the date of acquisition was recognized in the ALL through the provision for loan losses.

The following tables present the ALL and recorded investments in loans by category as of December 31:



	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



	2017
	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	$	—	$	27,235	$	27,235	$	3,546	$	2,682,448	$	2,685,994
Commercial and industrial	29		8,937		8,966		7,284		1,425,982		1,433,266
Commercial construction	—		13,167		13,167		5,464		378,870		384,334
Consumer real estate	21		5,458		5,479		10,488		1,180,163		1,190,651
Other consumer	27		1,516		1,543		41		67,163		67,204
Total	$	77	$	56,313	$	56,390	$	26,823	$	5,734,626	$	5,761,449