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Allowance for Credit Losses

6 Months Ended

Jun. 30, 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 June 30, 2020:


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

Commercial Real Estate
Pass	$	231,670	$	468,786	$	443,243	$	327,871	$	401,126	$	769,224	$	48,527	—		$	2,690,447
Special Mention	—		8,741		187		13,182		8,172		50,717		2,350		—		83,349
Substandard	—		—		938		9,098		22,059		49,912		2,890		—		84,897
Doubtful	—		—		—		—		471		2,859		80		—		3,410
Total Commercial Real Estate	231,670		477,527		444,368		350,151		431,828		872,712		53,847		—		2,862,103

Commercial and Industrial
Pass	350,890		224,067		162,559		88,479		56,286		301,155		383,176		44		1,566,656
Special Mention	39		14,104		3,722		917		6,977		10,302		42,199		—		78,260
Substandard	75		5,417		2,799		14,979		75		11,354		3,061		—		37,760
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial and Industrial	351,004		243,588		169,080		104,375		63,338		322,811		428,436		44		1,682,676

Commercial Construction
Pass	67,685		206,187		107,927		17,499		17,335		10,533		11,844		—		439,010
Special Mention	—		—		3,581		—		—		5,076		91		—		8,748
Substandard	—		—		—		1,742		—		3,598		—		—		5,340
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Construction	67,685		206,187		111,508		19,241		17,335		19,207		11,935		—		453,098

Business Banking
Pass	289,837		171,903		142,912		99,586		88,874		310,932		110,498		1,247		1,215,789
Special Mention	—		100		1,341		1,742		1,144		7,071		733		69		12,200
Substandard	—		627		3,115		4,616		4,036		27,566		680		206		40,846
Doubtful	—		—		—		—		—		—		—		—		—
Total Business Banking	289,837		172,630		147,368		105,944		94,054		345,569		111,911		1,522		1,268,835

Consumer Real Estate
Pass	59,273		143,091		81,972		79,203		87,809		309,636		421,987		7,123		1,190,094
Special Mention	—		—		—		—		798		300		—		—		1,098
Substandard	—		188		299		812		973		8,447		202		—		10,921
Doubtful	—		—		—		—		—		—		—		—		—
Total Consumer Real Estate	59,273		143,279		82,271		80,015		89,580		318,383		422,189		7,123		1,202,113

Other consumer
Pass	4,720		16,987		9,223		5,323		4,256		1,561		30,377		268		72,715
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		559		145		117		691		4,839		408		259		7,018
Doubtful	—		—		—		—		—		—		—		—		—
Total Other Consumer	4,720		17,546		9,368		5,440		4,947		6,400		30,785		527		79,733







Total Loan Balance	$	1,004,189	$	1,260,757	$	963,963	$	665,166	$	701,082	$	1,885,082	$	1,059,103	$	9,216	$	7,548,558

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 June 30, 2020:


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

Commercial Real Estate
Performing	$	231,670	$	477,527	$	444,368	$	350,151	$	411,792	$	839,942	$	50,877	$	—	$	2,806,327
Nonperforming	—		—		—		—		20,036		32,770		2,970		—		55,776
Total Commercial Real Estate	231,670		477,527		444,368		350,151		431,828		872,712		53,847		—		2,862,103

Commercial and Industrial
Performing	351,004		243,588		168,814		104,375		63,338		322,811		426,076		44		1,680,050
Nonperforming	—		—		266		—		—		—		2,360		—		2,626
Total Commercial and Industrial	351,004		243,588		169,080		104,375		63,338		322,811		428,436		44		1,682,676

Commercial Construction
Performing	67,685		206,187		111,508		18,200		17,335		18,744		11,935		—		451,594
Nonperforming	—		—		—		1,041		—		463		—		—		1,504
Total Commercial Construction	67,685		206,187		111,508		19,241		17,335		19,207		11,935		—		453,098

Business Banking
Performing	289,837		172,290		145,563		104,549		92,708		334,316		111,696		1,401		1,252,360
Nonperforming	—		340		1,805		1,395		1,346		11,253		215		121		16,475
Total Business Banking	289,837		172,630		147,368		105,944		94,054		345,569		111,911		1,522		1,268,835

Consumer Real Estate
Performing	59,273		143,174		81,327		78,888		88,576		309,984		421,895		7,123		1,190,240
Nonperforming	—		105		944		1,127		1,004		8,399		294		—		11,873
Total Consumer Real Estate	59,273		143,279		82,271		80,015		89,580		318,383		422,189		7,123		1,202,113

Other Consumer
Performing	4,720		17,069		9,368		5,338		4,664		5,630		30,594		491		77,874
Nonperforming	—		477		—		102		283		770		191		36		1,859
Total Other Consumer	4,720		17,546		9,368		5,440		4,947		6,400		30,785		527		79,733

Performing	1,004,189		1,259,835		960,948		661,501		678,413		1,831,427		1,053,073		9,059		7,458,445
Nonperforming	—		922		3,015		3,665		22,668		53,655		6,030		157		90,113
Total Loan Balance	$	1,004,189	$	1,260,757	$	963,963	$	665,166	$	701,082	$	1,885,082	$	1,059,103	$	9,216	$	7,548,558

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


	June 30, 2020⁽²⁾
(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	$	2,806,327	$	—	$	—	$	—	$	55,776	$	55,776	$	2,862,103
Commercial and industrial	1,678,314		—		230		1,506		2,626		4,362		1,682,676
Commercial construction	451,594		—		—		—		1,504		1,504		453,098
Business banking	1,248,611		839		2,910		—		16,475		20,224		1,268,835
Consumer real estate	1,184,530		1,429		3,709		572		11,873		17,583		1,202,113
Other consumer	77,420		201		131		122		1,859		2,313		79,733
Total	$	7,446,796	$	2,469	$	6,980	$	2,200	$	90,113	$	101,762	$	7,548,558

⁽¹⁾Represents acquired loans that were recorded at fair value at the acquisition date and remain performing at June 30, 2020.

⁽²⁾ We had 2,360 loans that were modified totaling $1.4 billion under the CARES Act at June 30, 2020. These customers were not considered past due as a result of their delayed payments. Upon exiting the loan modification deferral program, the measurement of loan delinquency will resume where it left off upon entry into the program. Due to the modification program, this delinquency table may not accurately reflect the credit risk associated with these loans.


	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 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:


								June 30, 2020
	June 30, 2020									For the three months ended	For the six months ended
(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⁽¹⁾	Interest Income Recognized on Nonaccrual⁽¹⁾
Commercial real estate	$	25,356	$	55,776	$14,889	$	—	$3	$12
Commercial and industrial	10,911		2,626		—	1,506		9	23
Commercial construction	737		1,504		1,218	—		—	—
Business banking	9,863		16,475		3,002	—		57	104
Consumer real estate	6,063		11,873		398	572		75	170
Other consumer	1,127		1,859		—	122		1	3
Total	$	54,057	$	90,113	$19,507	$	2,200	$145	$312

⁽¹⁾Represents only cash payments received and applied to interest on nonaccrual loans.

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


	June 30, 2020
	Type of Collateral
(dollars in thousands)	Real Estate	Blanket Lien	Investment/Cash	Other
Commercial real estate	$55,447	$40	$—	$—
Commercial and industrial	2,762	3,694	—	—
Commercial construction	5,215	—	—	—
Business banking	2,906	896	—	689
Consumer real estate	398	—	—	—

Total	$66,728	$4,630	$—	$689

The following table presents activity in the ACL for the three and six months ended June 30, 2020:


	Three Months Ended June 30, 2020
(dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Business Banking		Consumer Real Estate		Other Consumer		Total Loans
Allowance for credit losses on loans:
Balance at beginning of period	$	42,611	$	19,870	$	6,606	$	13,706	$	11,200	$	2,857	$	96,850
Provision for credit losses on loans	20,681		60,906		2,249		918		400		677		85,831
Charge-offs	(5,600)		(61,616)		—		(260)		(37)		(790)		(68,303)
Recoveries	38		4		19		40		22		108		231
Net (Charge-offs)/Recoveries	(5,562)		(61,612)		19		(220)		(15)		(682)		(68,072)
Balance at End of Period	$	57,730	$	19,164	$	8,874	$	14,404	$	11,585	$	2,852	$	114,609


	Six Months Ended June 30, 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	28,345		67,104		4,329		2,126		829		1,529		104,262
Charge-offs	(6,042)		(71,496)		—		(721)		(218)		(1,272)		(79,749)
Recoveries	40		22		21		101		112		224		520
Net (Charge-offs)/Recoveries	(6,002)		(71,474)		21		(620)		(106)		(1,048)		(79,229)
Balance at End of Period	$	57,730	$	19,164	$	8,874	$	14,404	$	11,585	$	2,852	$	114,609

⁽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.

During the three months ended June 30, 2020, we had a charge-off of $58.7 million related to a previously disclosed customer fraud resulting from a check kiting scheme. The fraud was perpetrated by a single business customer and a criminal investigation is ongoing. The check kiting scheme resulted in a deposit account overdraft, which became a loan to us that was charged off through the ACL. The customer also had a lending relationship that was originally $15.1 million, including a $14.3 million CRE loan and a $0.8 million line of credit. We recognized a $4.2 million charge-off related to this lending relationship during the three months ended June 30, 2020 and the remaining outstanding balance of $10.9 million is a nonperforming loan at June 30, 2020.

We added $14.4 million and $29.3 million to the ACL related to qualitative factors for the three and six months ended June 30, 2020. Included in these amounts were $14.8 million for the three months ended and $26.0 million for the sixth months ended for the economic forecast and an allocation for our hotel portfolio due to the COVID-19 pandemic. Our forecast covers a period of two years and is driven in part by national unemployment data. Changes in our current conditions qualitative factors resulted in a decrease of $0.4 million and an increase of $3.3 million to the ACL for the three and six months ended June 30, 2020.

The C&I portfolio included $547.6 million of loans originated under the PPP at June 30, 2020. The loans are 100 percent guaranteed by the SBA, therefore, we have not assigned any ACL at June 30, 2020.

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 and six months ended June 30, 2019:


	Three months ended						Six months ended
	June 30, 2019						June 30, 2019
(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	$	—	$	7,704	$	—
Commercial and industrial	758		13		772		26
Commercial construction	489		—		489		—
Consumer real estate	666		—		666		—
Other consumer	16		—		18		1
Total with a Related Allowance Recorded	9,632		13		9,649		27
Without a related allowance recorded:
Commercial real estate	21,802		77		22,093		124
Commercial and industrial	7,568		131		5,329		189
Commercial construction	2,319		48		2,319		83
Consumer real estate	7,952		93		7,979		188
Other consumer	3		—		4		—
Total without a Related Allowance Recorded	39,644		349		37,724		584
Total:
Commercial real estate	29,505		77		29,797		124
Commercial and industrial	8,326		144		6,101		215
Commercial construction	2,808		48		2,808		83
Consumer real estate	8,618		93		8,645		188
Other consumer	19		—		22		1
Total	$	49,276	$	362	$	47,373	$	611

The following table details activity in the allowance for loan losses for the three and six months ended June 30, 2019:


	Three 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	$	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 (Charge-offs)/Recoveries	(522)		(1,344)		2		97		(368)		(2,135)
Provision for credit 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


	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 credit 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

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