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 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, 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, or 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 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:



	September 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	$	2,820,689	$	664	$	424	$	4,595	$	5,683	$	2,826,372
Commercial and industrial	1,445,433		1,400		171		4,367		5,938		1,451,371
Commercial construction	282,489		66		—		1,228		1,294		283,783
Residential mortgage	689,464		2,242		1,440		6,721		10,403		699,867
Home equity	465,625		2,590		453		3,783		6,826		472,451
Installment and other consumer	67,291		135		71		45		251		67,542
Consumer construction	6,421		—		—		—		—		6,421
Loans held for sale	4,207		—		—		—		—		4,207
Total	$	5,781,619	$	7,097	$	2,559	$	20,739	$	30,395	$	5,812,014



	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 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:



	September 30, 2018
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	2,665,516	94.3	%	$	1,356,159	93.4	%	$	256,227	90.3	%	$	4,277,902	93.8	%
Special mention	76,906		2.7	%	38,306		2.6	%	9,914		3.5	%	125,126		2.7	%
Substandard	83,950		3.0	%	56,906		4.0	%	17,642		6.2	%	158,498		3.5	%
Total	$	2,826,372	100.0	%	$	1,451,371	100.0	%	$	283,783	100.0	%	$	4,561,526	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	%

Substandard loans increased $87.8 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:



	September 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	$	693,146	99.0	%	$	468,668	99.2	%	$	67,497	99.9	%	$	6,421	100.0	%	$	1,235,732	99.2	%
Nonperforming	6,721		1.0	%	3,783		0.8	%	45		0.1	%	—		—	%	10,549		0.8	%
Total	$	699,867	100.0	%	$	472,451	100.0	%	$	67,542	100.0	%	$	6,421	100.0	%	$	1,246,281	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:



	September 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	490		489		268		—		—		—
Consumer real estate	15		15		10		21		21		21
Other consumer	15		16		16		27		27		27
Total with a Related Allowance Recorded	520		520		294		1,783		1,835		77
Without a related allowance recorded:
Commercial real estate	3,703		4,069		—		3,546		3,811		—
Commercial and industrial	14,548		16,271		—		5,549		7,980		—
Commercial construction	2,808		4,318		—		5,464		8,132		—
Consumer real estate	9,142		10,138		—		10,467		11,357		—
Other consumer	7		15		—		14		22		—
Total without a Related Allowance Recorded	30,208		34,811		—		25,040		31,302		—
Total:
Commercial real estate	3,703		4,069		—		3,546		3,811		—
Commercial and industrial	14,548		16,271		—		7,284		9,767		29
Commercial construction	3,298		4,807		268		5,464		8,132		—
Consumer real estate	9,157		10,153		10		10,488		11,378		21
Other consumer	22		31		16		41		49		27
Total	$	30,728	$	35,331	$	294	$	26,823	$	33,137	$	77

The following tables summarize average recorded investment in and interest income recognized on loans considered to be impaired for the periods presented:



	Three Months Ended
	September 30, 2018				September 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	—		—		2,406		37
Commercial construction	496		—		—		—
Consumer real estate	15		—		23		1
Other consumer	17		1		32		2
Total with a Related Allowance Recorded	528		1		2,461		40
Without a related allowance recorded:
Commercial real estate	3,744		41		6,415		105
Commercial and industrial	14,412		73		9,074		130
Commercial construction	2,809		61		7,140		154
Consumer real estate	9,320		112		11,149		250
Other consumer	13		—		28		—
Total without a Related Allowance Recorded	30,298		287		33,806		639
Total:
Commercial real estate	3,744		41		6,415		105
Commercial and industrial	14,412		73		11,480		167
Commercial construction	3,305		61		7,140		154
Consumer real estate	9,335		112		11,172		251
Other consumer	30		1		60		2
Total	$	30,826	$	288	$	36,267	$	679



	Nine Months Ended
	September 30, 2018				September 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	—		—		1,218		44
Commercial construction	585		—		—		—
Consumer real estate	16		1		24		1
Other consumer	21		1		35		1
Total with a Related Allowance Recorded	622		2		1,277		46
Without a related allowance recorded:
Commercial real estate	3,895		126		6,577		140
Commercial and industrial	11,567		232		11,001		164
Commercial construction	2,813		134		7,222		194
Consumer real estate	10,031		370		11,488		382
Other consumer	15		—		33		1
Total without a Related Allowance Recorded	28,321		862		36,321		881
Total:
Commercial real estate	3,895		126		6,577		140
Commercial and industrial	11,567		232		12,219		208
Commercial construction	3,398		134		7,222		194
Consumer real estate	10,047		371		11,512		383
Other consumer	36		1		68		2
Total	$	28,943	$	864	$	37,598	$	927

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



	Three Months Ended September 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	$	31,232		$	10,874		$	11,676		$	5,241		$	1,494		$	60,517
Charge-offs	(141		)	(181		)	—			(487		)	(425		)	(1,234		)
Recoveries	64			504			4			70			169			811
Net (Charge-offs)/ Recoveries	(77		)	323			4			(417		)	(256		)	(423		)
Provision for loan losses	1,735			(971		)	(765		)	214			249			462
Balance at End of Period	$	32,890		$	10,226		$	10,915		$	5,038		$	1,487		$	60,556


	Three Months Ended September 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	$	24,358		$	9,256		$	13,944		$	5,803		$	1,990		$	55,351
Charge-offs	(37		)	(644		)	(1,453		)	(101		)	(425		)	(2,660		)
Recoveries	182			243			473			91			182			1,171
Net (Charge-offs)/ Recoveries	145			(401		)	(980		)	(10		)	(243		)	(1,489		)
Provision for loan losses	472			859			1,951			(262		)	(170		)	2,850
Balance at End of Period	$	24,975		$	9,714		$	14,915		$	5,531		$	1,577		$	56,712


	Nine Months Ended September 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	(373		)	(8,403		)	(321		)	(916		)	(1,298		)	(11,311		)
Recoveries	293			985			1,134			393			393			3,198
Net (Charge-offs)/Recoveries	(80		)	(7,418		)	813			(523		)	(905		)	(8,113		)
Provision for loan losses	5,735			8,678			(3,065		)	82			849			12,279
Balance at End of Period	$	32,890		$	10,226		$	10,915		$	5,038		$	1,487		$	60,556


	Nine Months Ended September 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	(2,100		)	(4,041		)	(2,097		)	(1,957		)	(1,228		)	(11,423		)
Recoveries	415			499			842			270			433			2,459
Net Charge-offs	(1,685		)	(3,542		)	(1,255		)	(1,687		)	(795		)	(8,964		)
Provision for loan losses	6,684			2,446			2,171			1,123			477			12,901
Balance at End of Period	$	24,975		$	9,714		$	14,915		$	5,531		$	1,577		$	56,712

Net charge-offs and provision for loan losses for the nine months ended September 30, 2018 were significantly impacted by 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 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 do not expect to incur any further charge-offs.

The following tables present the ALLL and recorded investments in loans by category as of the periods presented:



	September 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	$	—	$	32,890	$	32,890	$	3,703	$	2,822,669	$	2,826,372
Commercial and industrial	—		10,226		10,226		14,548		1,436,823		1,451,371
Commercial construction	268		10,647		10,915		3,298		280,485		283,783
Consumer real estate	10		5,028		5,038		9,157		1,169,582		1,178,739
Other consumer	16		1,471		1,487		22		67,520		67,542
Total	$	294	$	60,262	$	60,556	$	30,728	$	5,777,079	$	5,807,807

	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