Allowance for Credit Losses

3 Months Ended

Mar. 31, 2020

We maintain an ACL at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers our historical loss experience, current conditions and forecasts of future economic conditions as of the balance sheet date. We develop and document a systematic ACL methodology based on the following portfolio segments: 1) Construction, 2) Commercial Real Estate, or CRE, 3) Commercial and Industrial, or C&I, 4) Business Banking, 5) Consumer Real Estate and 6) 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, retail, multifamily, and health care. 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.

Business Banking—Commercial loans made to small businesses that are standard, non-complex products evaluated through a streamlined credit approval process that has been designed to maximize efficiency while maintaining high credit quality standards that meet small business market customers’ needs. The business banking portfolio is monitored by utilizing a standard and closely managed process focusing on behavioral and performance criteria. 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 business.

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.

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

We monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans 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.

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.

Doubtful—Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of March 31, 2020:



	Risk Rating
(dollars in thousands)	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Revolving-Term		Total

Commercial Real Estate
Pass	$	169,367	$	483,699	$	452,024	$	359,553	$	416,420	$	882,326	$	59,032	—		$	2,822,421
Special Mention	—		3,236		187		11,591		10,005		26,575		850		—		52,444
Substandard	—		—		1,462		—		25,285		50,348		3,008		21		80,124
Total Commercial Real Estate	169,367		486,935		453,673		371,144		451,710		959,249		62,890		21		2,954,989

Commercial and Industrial
Pass	75,969		240,261		165,631		103,537		73,798		282,138		486,045		—		1,427,379
Special Mention	—		6,239		3,525		947		1,883		9,437		31,890		—		53,921
Substandard	—		5,666		2,301		3,785		1,621		12,232		17,316		—		42,921
Total Commercial and Industrial	75,969		252,166		171,457		108,269		77,302		303,807		535,251		—		1,524,221

Commercial Construction
Pass	23,004		179,956		117,527		17,122		18,986		11,586		11,992		—		380,173
Special Mention	—		—		—		—		—		5,117		91		—		5,208
Substandard	—		—		—		1,041		—		3,780		—		—		4,821
Total Commercial Construction	23,004		179,956		117,527		18,163		18,986		20,483		12,083		—		390,202

Business Banking
Pass	40,952		181,242		148,419		103,027		89,925		327,333		125,800		—		1,016,698
Special Mention	—		62		1,496		1,775		1,181		7,902		737		—		13,153
Substandard	—		382		3,111		3,646		4,006		27,803		1,665		—		40,613
Total Business Banking	40,952		181,686		153,026		108,448		95,112		363,038		128,202		—		1,070,464

Consumer Real Estate
Pass	33,737		149,942		86,463		83,402		92,013		316,169		432,274		20,966		1,214,966
Special Mention	—		—		—		—		798		304		—		—		1,102
Substandard	—		190		71		537		1,103		7,410		305		1,385		11,001
Total Consumer Real Estate	33,737		150,132		86,534		83,939		93,914		323,883		432,579		22,351		1,227,069

Other consumer
Pass	8,706		9,522		10,670		6,474		5,088		3,365		28,156		773		72,754
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		488		132		132		594		4,252		322		1,126		7,046
Total Other Consumer	8,706		10,010		10,802		6,606		5,682		7,617		28,478		1,899		79,800

Total Loan Balance	$	351,735	$	1,260,885	$	993,019	$	696,569	$	742,706	$	1,978,077	$	1,199,483	$	24,271	$	7,246,745

We monitor the delinquent status of the commercial and consumer portfolios 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 table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of March 31, 2020:



(dollars in thousands)	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Revolving-Term		Total

Commercial Real Estate
Performing	$	169,367	$	486,935	$	453,673	$	371,144	$	431,919	$	935,536	$	59,882	$	—	$	2,908,456
Nonperforming	—		—		—		—		19,791		23,713		3,008		21		46,533
Total Commercial Real Estate	169,367		486,935		453,673		371,144		451,710		959,249		62,890		21		2,954,989

Commercial and Industrial
Performing	75,969		252,166		171,093		108,269		76,593		303,745		531,881		—		1,519,716
Nonperforming	—		—		364		—		709		62		3,370		—		4,505
Total Commercial and Industrial	75,969		252,166		171,457		108,269		77,302		303,807		535,251		—		1,524,221

Commercial Construction
Performing	23,004		179,956		117,527		18,055		18,986		20,020		12,083		—		389,631
Nonperforming	—		—		—		108		—		463		—		—		571
Total Commercial Construction	23,004		179,956		117,527		18,163		18,986		20,483		12,083		—		390,202

Business Banking
Performing	40,952		181,576		151,933		107,176		94,230		355,259		128,022		—		1,059,148
Nonperforming	—		110		1,093		1,272		882		7,779		180		—		11,316
Total Business Banking	40,952		181,686		153,026		108,448		95,112		363,038		128,202		—		1,070,464

Consumer Real Estate
Performing	33,737		149,942		86,401		83,526		90,151		318,926		432,403		21,367		1,216,453
Nonperforming	—		190		133		413		3,763		4,957		176		984		10,616
Total Consumer Real Estate	33,737		150,132		86,534		83,939		93,914		323,883		432,579		22,351		1,227,069

Other Consumer
Performing	8,706		10,010		10,802		6,606		5,682		7,359		28,478		1,899		79,542
Nonperforming	—		—		—		—		—		258		—		—		258
Total Other Consumer	8,706		10,010		10,802		6,606		5,682		7,617		28,478		1,899		79,800

Performing	351,735		1,260,585		991,429		694,776		717,561		1,940,845		1,192,749		23,266		7,172,946
Nonperforming	—		300		1,590		1,793		25,145		37,232		6,734		1,005		73,799
Total Loan Balance	$	351,735	$	1,260,885	$	993,019	$	696,569	$	742,706	$	1,978,077	$	1,199,483	$	24,271	$	7,246,745

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



	March 31, 2020
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due⁽¹⁾		Non - performing		Total Past Due Loans		Total Loans
Commercial real estate	$	2,901,375	$	6,381	$	—	$	700	$	46,533	$	53,614	$	2,954,989
Commercial and industrial	1,516,639		463		—		2,615		4,505		7,582		1,524,221
Commercial construction	388,122		576		—		933		571		2,080		390,202
Business banking	1,048,241		6,758		3,381		768		11,316		22,223		1,070,464
Consumer real estate	1,211,865		3,859		646		83		10,616		15,203		1,227,069
Other consumer	79,083		174		91		195		258		717		79,800
Total	$	7,145,326	$	18,211	$	4,117	$	5,294	$	73,799	$	101,419	$	7,246,745

⁽¹⁾Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument.



	December 31, 2019
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due⁽¹⁾		Non - performing		Total Past Due Loans		Total Loans
Commercial real estate	$	3,025,505	$	7,749	$	71	$	911	$	25,356	$	34,087	$	3,059,592
Commercial and industrial	1,466,460		126		1,589		1,443		10,911		14,069		1,480,529
Commercial construction	367,204		956		1,163		—		737		2,856		370,060
Business banking	830,735		5,093		1,099		—		9,863		16,055		846,790
Consumer real estate	1,283,591		2,620		1,758		1,175		6,063		11,616		1,295,207
Other consumer	81,866		1,448		305		228		1,127		3,108		84,974
Total	$	7,055,361	$	17,992	$	5,985	$	3,757	$	54,057	$	81,791	$	7,137,152

⁽¹⁾Represents acquired loans that were recorded at fair value at the acquisition date and remain performing at March 31, 2020 and December 31, 2019.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan:



	As or for the Three Months Ended March 31, 2020
(dollars in thousands)	Beginning of Period Nonaccrual		End of Period Nonaccrual		Nonaccrual With No Related Allowance		Past Due 90+ Days Still Accruing		Interest Income Recognized on Nonaccrual
Commercial real estate		$25,356	$	46,533		$39,454	$	700		$684
Commercial and industrial	10,911		4,505		4,054		2,615		64
Commercial construction	737		571		285		933		—
Business banking	9,863		11,316		2,363		768		58
Consumer real estate	6,063		10,616		398		83		47
Other consumer	1,127		258		—		195		28
Total		$54,057		$73,799		$46,554	$	5,294		$881

The following table presents collateral-dependent loans by class of loan:



	March 31, 2020
	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Investment/Cash		Other
Commercial real estate		$51,630		$—		$—		$—
Commercial and industrial	4,686		4,545		40		—
Commercial construction	3,602		—		—		—
Business banking	2,322		876		—		689
Consumer real estate	—		—		—		—
Other consumer	398		—		—		—
Total		$62,638		$5,421		$40		$689

The following table presents activity in the ACL for the three months ended March 31, 2020:



	Three Months Ended March 31, 2020
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Business Banking⁽¹⁾			Consumer Real Estate			Other Consumer			Total Loans
Allowance for credit losses on loans:
Balance at beginning of period	$	30,577		$	15,681		$	7,900		$	—		$	6,337		$	1,729		$	62,224
Impact of CECL adoption	4,810			7,853			(3,376		)	12,898			4,525			642			27,352
Provision for credit losses on loans	7,639			6,196			2,309			1,194			472			620			18,430
Charge-offs	(442		)	(9,879		)	(229		)	(460		)	(172		)	(248		)	(11,430		)
Recoveries	27			19			2			74			38			114			274
Net (Charge-offs)/Recoveries	(415		)	(9,860		)	(227		)	(386		)	(134		)	(134		)	(11,156		)
Balance at End of Period	$	42,611		$	19,870		$	6,606		$	13,706		$	11,200		$	2,857		$	96,850

⁽¹⁾ In connection with our adoption of ASU 2016-13, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Our new segmentation breaks out business banking loans from our other loan segments: CRE, C&I , commercial construction, consumer real estate and other consumer. The business banking allowance balance at the beginning of period is included in the other segments and reclassified to business banking through the impact of CECL adoption line.

The adoption of ASU 2016-13 resulted in an increase to our ACL of $27.4 million on January 1, 2020. The increase included $8.2 million for S&T legacy loans and $9.3 million for acquired loans from the DNB merger. We also recorded a day one adjustment of $9.9 million primarily related to a C&I relationship that was charged off in the first quarter of 2020. We obtained information on the relationship subsequent to filing our December 31, 2019 10-K, but before the end of the first quarter of 2020. The updated information supported a loss existed at January 1, 2020. The significant increase in the provision for credit losses during the three months ended March 31, 2020 was mainly due to the COVID-19 pandemic. We added approximately $14.9 million to the ACL in the first quarter of 2020 related to qualitative factors. This included $11.2 million for a revised economic forecast and the impact of that forecast on certain loan portfolios due to the COVID-19 pandemic. Changes in current conditions resulted in an additional $3.7 million increase in the ACL.

Prior to the adoption of ASU 326 on January 1, 2020, we calculated our allowance for loan losses using an incurred loan loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings as of December 31, 2019:



	December 31, 2019
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	3,270,437	95.7	%	$	1,636,314	93.4	%	$	347,324	92.5	%	$	5,254,076	95.3	%
Special mention	57,285		1.7	%	36,484		1.7	%	10,109		2.7	%	103,878		1.9	%
Substandard	86,772		2.5	%	47,980		4.9	%	17,899		4.8	%	152,651		2.8	%
Doubtful	2,023		—	%	55		—	%	133		—	%	2,191		—	%
Total	$	3,416,518	100.0	%	$	1,720,833	100.0	%	$	375,445	100.0	%	$	5,512,796	100.0	%

The following table presents the recorded investment in consumer loan classes by performing and nonperforming status as of December 31, 2019:



	December 31, 2019
(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	$	991,066	99.2	%	$	535,709	99.5	%	$	78,993	99.9	%	$	8,390	100.0	%	$	1,614,158	99.4	%
Nonperforming	7,519		0.8	%	2,639		0.5	%	40		0.1	%	—		—	%	10,198		0.6	%
Total	$	998,585	100.0	%	$	538,348	100.0	%	$	79,033	100.0	%	$	8,390	100.0	%	$	1,624,356	100.0	%

The following table presents investments in loans considered to be impaired and related information on those impaired loans as of December 31, 2019:



	December 31, 2019
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With a related allowance recorded:
Commercial real estate	$	13,011	$	14,322	$	2,023
Commercial and industrial	10,001		10,001		55
Commercial construction	489		489		113
Consumer real estate	—		—		—
Other consumer	9		9		9
Total with a Related Allowance Recorded	23,510		24,821		2,200
Without a related allowance recorded:
Commercial real estate	34,909		40,201		—
Commercial and industrial	7,605		10,358		—
Commercial construction	1,425		2,935		—
Consumer real estate	7,884		8,445		—
Other consumer	4		11		—
Total without a Related Allowance Recorded	51,827		61,950		—
Total:
Commercial real estate	47,920		54,523		2,023
Commercial and industrial	17,606		20,359		55
Commercial construction	1,914		3,424		113
Consumer real estate	7,884		8,445		—
Other consumer	13		20		9
Total	$	75,337	$	86,771	$	2,200

The following table presents average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019:



	Three months ended
	March 31, 2019
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:
Commercial real estate	$	15,107	$	144
Commercial and industrial	12,780		209
Commercial construction	2,319		140
Consumer real estate	8,846		417
Other consumer	4		—
Total with a Related Allowance Recorded	39,056		910
Without a related allowance recorded:
Commercial real estate	12,983		400
Commercial and industrial	980		35
Commercial construction	489		—
Consumer real estate	14		1
Other consumer	10		1
Total without a Related Allowance Recorded	14,476		437
Total:
Commercial real estate	28,090		544
Commercial and industrial	13,760		244
Commercial construction	2,808		140
Consumer real estate	8,860		418
Other consumer	14		1
Total	$	53,532	$	1,347

The following table details activity in the allowance for loan losses for the three months ended March 31, 2019:



	Three Months Ended March 31, 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		$	1,494		$	6,996
Charge-offs	(1		)	(5,477		)	—			(162		)	(425		)	(6,023		)
Recoveries	122			417			—			148			169			787
Net (Charge-offs)/Recoveries	121			(5,060		)	—			(14		)	(256		)	(5,236		)
Provision for credit losses	1,075			5,460			(1,226		)	5			249			5,649
Balance at End of Period	$	34,903		$	11,996		$	6,757		$	6,178		$	1,487		$	61,409

The following tables present the allowance for loan losses and recorded investments in loans by category as of December 31,2019:



	December 31, 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	$	2,023	$	28,554	$	30,577	$	47,920	$	3,368,598	$	3,416,518
Commercial and industrial	55		15,626		15,681		17,606		1,703,227		1,720,833
Commercial construction	113		7,787		7,900		1,914		373,531		375,445
Consumer real estate	—		6,337		6,337		7,884		1,537,439		1,545,323
Other consumer	9		1,720		1,729		13		79,020		79,033
Total	$	2,200	$	60,024	$	62,224	$	75,337	$	7,061,815	$	7,137,152