ALLOWANCE FOR LOAN LOSSES | ALLOWANCE FOR LOAN LOSSES We maintain an allowance for loan losses, or ALLL, 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 ALLL methodology based on the following portfolio segments: 1) 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 do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Commercial Construction —Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be 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, 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 ALLL 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. 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: June 30, 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 $ 2,781,239 $ 2,473 $ 312 $ 4,617 $ 7,402 $ 2,788,641 Commercial and industrial 1,450,174 432 119 4,853 5,404 1,455,578 Commercial construction 297,849 68 — 1,870 1,938 299,787 Residential mortgage 689,751 1,445 1,132 6,112 8,689 698,440 Home equity 465,261 1,906 584 3,871 6,361 471,622 Installment and other consumer 66,371 172 46 49 267 66,638 Consumer construction 5,412 — — — — 5,412 Loans held for sale 3,801 — — — — 3,801 Total $ 5,759,858 $ 6,496 $ 2,193 $ 21,372 $ 30,061 $ 5,789,919 December 31, 2017 (dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due Non - performing Total Past 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 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. 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: June 30, 2018 (dollars in thousands) Commercial Real Estate % of Total Commercial and Industrial % of Total Commercial Construction % of Total Total % of Total Pass $ 2,636,581 94.5 % $ 1,337,331 91.9 % $ 272,433 90.9 % $ 4,246,345 93.4 % Special mention 74,169 2.7 % 50,142 3.4 % 8,566 2.8 % 132,877 3.0 % Substandard 77,891 2.8 % 68,105 4.7 % 18,788 6.3 % 164,784 3.6 % Total $ 2,788,641 100.0 % $ 1,455,578 100.0 % $ 299,787 100.0 % $ 4,544,006 100.0 % 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 % 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: June 30, 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 $ 692,328 99.1 % $ 467,751 99.2 % $ 66,589 99.9 % $ 5,412 100.0 % $ 1,232,080 99.2 % Nonperforming 6,112 0.9 % 3,871 0.8 % 49 0.1 % — — % 10,032 0.8 % Total $ 698,440 100.0 % $ 471,622 100.0 % $ 66,638 100.0 % $ 5,412 100.0 % $ 1,242,112 100.0 % 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. All TDRs will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs and all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate. The following tables summarize investments in loans considered to be impaired and related information on those impaired loans as of the dates presented: June 30, 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 $ — $ — $ — $ — $ — $ — Commercial and industrial — — — 1,735 1,787 29 Commercial construction — — — — — — Consumer real estate — — — 21 21 21 Other consumer 35 35 35 27 27 27 Total with a Related Allowance Recorded 35 35 35 1,783 1,835 77 Without a related allowance recorded: Commercial real estate 3,555 3,828 — 3,546 3,811 — Commercial and industrial 17,539 19,281 — 5,549 7,980 — Commercial construction 3,441 4,950 — 5,464 8,132 — Consumer real estate 9,186 10,132 — 10,467 11,357 — Other consumer 9 13 — 14 22 — Total without a Related Allowance Recorded 33,730 38,204 — 25,040 31,302 — Total: Commercial real estate 3,555 3,828 — 3,546 3,811 — Commercial and industrial 17,539 19,281 — 7,284 9,767 29 Commercial construction 3,441 4,950 — 5,464 8,132 — Consumer real estate 9,186 10,132 — 10,488 11,378 21 Other consumer 44 48 35 41 49 27 Total $ 33,765 $ 38,239 $ 35 $ 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 periods presented: Three Months Ended June 30, 2018 June 30, 2017 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial real estate $ — $ — $ — $ — Commercial and industrial — — 813 6 Commercial construction — — — — Consumer real estate — — 24 1 Other consumer 38 1 26 — Total with a Related Allowance Recorded 38 1 863 7 Without a related allowance recorded: Commercial real estate 3,609 54 6,934 35 Commercial and industrial 8,060 210 17,625 95 Commercial construction 3,443 33 4,262 42 Consumer real estate 9,483 118 11,280 125 Other consumer 10 — 11 1 Total without a Related Allowance Recorded 24,605 415 40,112 298 Total: Commercial real estate 3,609 54 6,934 35 Commercial and industrial 8,060 210 18,438 101 Commercial construction 3,443 33 4,262 42 Consumer real estate 9,483 118 11,304 126 Other consumer 48 1 37 1 Total $ 24,643 $ 416 $ 40,975 $ 305 Six Months Ended June 30, 2018 June 30, 2017 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial real estate $ — $ — $ — $ — Commercial and industrial — — 628 11 Commercial construction — — — — Consumer real estate — — 25 1 Other consumer 40 2 27 1 Total with a Related Allowance Recorded 40 2 680 13 Without a related allowance recorded: Commercial real estate 3,712 85 7,028 70 Commercial and industrial 7,796 218 16,382 124 Commercial construction 3,445 73 4,267 79 Consumer real estate 10,128 253 11,514 255 Other consumer 11 — 12 — Total without a Related Allowance Recorded 25,092 629 39,203 528 Total: Commercial real estate 3,712 85 7,028 70 Commercial and industrial 7,796 218 17,010 135 Commercial construction 3,445 73 4,267 79 Consumer real estate 10,128 253 11,539 256 Other consumer 51 2 39 1 Total $ 25,132 $ 631 $ 39,883 $ 541 The following tables detail activity in the ALLL for the periods presented: 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 (Charge-offs)/ Recoveries (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 Three Months Ended June 30, 2017 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 20,570 $ 13,244 $ 14,102 $ 5,956 $ 1,944 $ 55,816 Charge-offs (1,673 ) (2,682 ) — (1,097 ) (370 ) (5,822 ) Recoveries 155 69 113 76 75 488 Net (Charge-offs)/ Recoveries (1,518 ) (2,613 ) 113 (1,021 ) (295 ) (5,334 ) Provision for loan losses 5,306 (1,375 ) (271 ) 868 341 4,869 Balance at End of Period $ 24,358 $ 9,256 $ 13,944 $ 5,803 $ 1,990 $ 55,351 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)/Recoveries (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 Six Months Ended June 30, 2017 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 19,976 $ 10,810 $ 13,999 $ 6,095 $ 1,895 $ 52,775 Charge-offs (2,063 ) (3,396 ) (644 ) (1,856 ) (804 ) (8,763 ) Recoveries 233 255 369 179 251 1,287 Net (Charge-offs)/Recoveries (1,830 ) (3,141 ) (275 ) (1,677 ) (553 ) (7,476 ) Provision for loan losses 6,212 1,587 220 1,385 648 10,052 Balance at End of Period $ 24,358 $ 9,256 $ 13,944 $ 5,803 $ 1,990 $ 55,351 Net charge-offs and provision for loan losses for the three and six months ended June 30, 2018 were 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. S&T’s total exposure consisted of the participation loan of $4.9 million and a direct exposure of $950 thousand which is secured by vehicles and equipment liens. The following tables present the ALLL and recorded investments in loans by category as of the periods presented: June 30, 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 $ — $ 31,232 $ 31,232 $ 3,555 $ 2,785,086 $ 2,788,641 Commercial and industrial — 10,874 10,874 17,539 1,438,039 1,455,578 Commercial construction — 11,676 11,676 3,441 296,346 299,787 Consumer real estate — 5,241 5,241 9,186 1,166,288 1,175,474 Other consumer 35 1,459 1,494 44 66,594 66,638 Total $ 35 $ 60,482 $ 60,517 $ 33,765 $ 5,752,353 $ 5,786,118 December 31, 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 |