ALLOWANCE FOR CREDIT LOSSES | ALLOWANCE FOR CREDIT LOSSES 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 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 % of Commercial % of Commercial % of Total % of 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 Unpaid Related 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 |