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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 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________
FORM 10-Q
______________________________________ 
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to                
Commission file number 0-12508
______________________________________ 
S&T BANCORP INC
(Exact name of registrant as specified in its charter)
______________________________________ 
Pennsylvania
  25-1434426
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)
800 Philadelphia Street Indiana PA   15701
(Address of principal executive offices)   (zip code)
800-325-2265
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $2.50 par value STBA The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 


Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐ 
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, $2.50 Par Value - 39,251,638 shares as of August 3, 2020

Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES



INDEX
S&T BANCORP, INC. AND SUBSIDIARIES
 
    Page No.    
Consolidated Balance Sheets - June 30, 2020 and December 31, 2019
2
3
4
6
7
48
68
70
70
70
71
71
72
72
72
73
1
Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)


June 30, 2020 December 31, 2019
(dollars in thousands, except per share data) (Unaudited) (Audited)
ASSETS
Cash and due from banks, including interest-bearing deposits of $277,670 and $124,491 at June 30, 2020 and December 31, 2019
$ 351,365    $ 197,823   
Securities, at fair value 804,366    784,283   
Loans held for sale 14,259    5,256   
Portfolio loans, net of unearned income 7,548,558    7,137,152   
Allowance for credit losses on loans (114,609)   (62,224)  
Portfolio loans, net 7,433,949    7,074,928   
Bank owned life insurance 81,443    80,473   
Premises and equipment, net 56,441    56,940   
Federal Home Loan Bank and other restricted stock, at cost 15,151    22,977   
Goodwill 373,289    371,621   
Other intangible assets, net 9,743    10,919   
Other assets 334,290    159,429   
Total Assets $ 9,474,296    $ 8,764,649   
LIABILITIES
Deposits:
Noninterest-bearing demand $ 2,250,958    $ 1,698,082   
Interest-bearing demand 1,055,261    962,331   
Money market 2,121,588    1,949,811   
Savings 916,268    830,919   
Certificates of deposit 1,523,841    1,595,433   
Total Deposits 7,867,916    7,036,576   
Securities sold under repurchase agreements 92,159    19,888   
Short-term borrowings 84,541    281,319   
Long-term borrowings 49,489    50,868   
Junior subordinated debt securities 64,053    64,277   
Other liabilities 180,361    119,723   
Total Liabilities 8,338,519    7,572,651   
SHAREHOLDERS’ EQUITY
Common stock ($2.50 par value)
Authorized—50,000,000 shares
Issued—41,449,444 shares at June 30, 2020 and December 31, 2019
Outstanding— 39,263,460 shares at June 30, 2020 and 39,560,304 shares at December 31, 2019
103,623    103,623   
Additional paid-in capital 400,417    399,944   
Retained earnings 692,240    761,083   
Accumulated other comprehensive income (loss) 9,232    (11,670)  
Treasury stock (2,185,984 shares at June 30, 2020 and 1,889,140 shares at December 31, 2019, at cost)
(69,735)   (60,982)  
Total Shareholders’ Equity 1,135,777    1,191,998   
Total Liabilities and Shareholders’ Equity $ 9,474,296    $ 8,764,649   

See Notes to Consolidated Financial Statements
2
Table of Contents

S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
  Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands, except per share data) 2020 2019 2020 2019
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 75,498    $ 74,728    $ 157,549    $ 148,120   
Investment Securities:
Taxable 3,791    3,647    8,074    7,437   
Tax-exempt 959    834    1,762    1,679   
Dividends 231    415    684    978   
Total Interest and Dividend Income 80,479    79,624    168,069    158,214   
INTEREST EXPENSE
Deposits 9,227    16,055    24,565    31,036   
Borrowings and junior subordinated debt securities 1,104    2,742    3,320    5,995   
Total Interest Expense 10,331    18,797    27,885    37,031   
NET INTEREST INCOME 70,148    60,827    140,184    121,183   
Provision for credit losses 86,759    2,205    106,809    7,854   
Net Interest (Loss) Income After Provision for Credit Losses (16,611)   58,622    33,375    113,329   
NONINTEREST INCOME
Net gain on sale of securities 142    —    142    —   
Debit and credit card 3,612    3,501    7,093    6,476   
Mortgage banking 2,623    637    3,859    1,131   
Wealth management 2,586    2,062    4,949    4,109   
Service charges on deposit accounts 2,342    3,212    5,900    6,365   
Commercial loan swap income 945    1,102    3,429    1,683   
Other 2,974    2,387    2,255    4,499   
Total Noninterest Income 15,224    12,901    27,627    24,263   
NONINTEREST EXPENSE
Salaries and employee benefits 21,419    20,290    42,754    41,199   
Data processing and information technology 3,585    3,414    7,453    6,646   
Net occupancy 3,437    2,949    7,202    5,986   
Furniture, equipment and software 3,006    2,301    5,525    4,531   
Professional services and legal 1,932    1,145    2,980    2,329   
Other taxes 1,604    1,456    3,205    2,641   
FDIC insurance 1,048    695    1,818    1,211   
Marketing 979    1,310    2,090    2,452   
Merger related expenses —    618    2,342    618   
Other 6,468    6,174    14,501    11,658   
Total Noninterest Expense 43,478    40,352    89,869    79,271   
(Loss) Income Before Taxes (44,865)   31,171    (28,867)   58,321   
Income tax (benefit) expense (11,793)   5,070    (9,026)   9,292   
Net (Loss) Income $ (33,072)   $ 26,101    $ (19,841)   $ 49,029   
(Loss) earnings per share—basic $ (0.85)   $ 0.76    $ (0.51)   $ 1.43   
(Loss) earnings per share—diluted $ (0.85)   $ 0.76    $ (0.51)   $ 1.43   
Dividends declared per share $ 0.28    $ 0.27    $ 0.56    $ 0.54   
Comprehensive (Loss) Income $ (29,512)   $ 33,513    $ 1,061    $ 62,617   
See Notes to Consolidated Financial Statements

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S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)


For the three months ended June 30, 2019
(dollars in thousands, except share and per share data) Common
Stock 		Additional
Paid-in
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive (Loss) Income 		Treasury
Stock 		Total
Balance at March 31, 2019 $ 90,326    $ 210,949    $ 716,078    $ (16,931)   $ (57,266)   $ 943,156   
Net income for the three months ended June 30, 2019 —    —    26,101    —    —    26,101   
Other comprehensive income (loss), net of tax —    —    —    7,412    —    7,412   
Cash dividends declared ($0.27 per share)
—    —    (9,242)   —    —    (9,242)  
Treasury stock issued for restricted stock awards (83,056 shares, net of forfeitures of 10,918 shares)
—    —    (2,360)   —    2,345    (15)  
Repurchase of common stock (71,936 shares)
—    —    —    —    (2,835)   (2,835)  
Recognition of restricted stock compensation expense —    376    —    —    —    376   
Balance at June 30, 2019 $ 90,326    $ 211,325    $ 730,577    $ (9,519)   $ (57,756)   $ 964,953   
For the three months ended June 30, 2020
(dollars in thousands, except share and per share data) Common
Stock 		Additional
Paid-in
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive (Loss) Income 		Treasury
Stock 		Total
Balance at March 31, 2020 $ 103,623    $ 400,387    $ 740,726    $ 5,672    $ (74,157)   $ 1,176,251   
Net loss for the three months ended June 30, 2020 —    —    (33,072)   —    —    (33,072)  
Other comprehensive income (loss), net of tax —    —    —    3,560    —    3,560   
Cash dividends declared ($0.28 per share)
—    —    (10,961)   —    —    (10,961)  
Treasury stock issued for restricted stock awards (143,744 shares, net of forfeitures of 5,709 shares)
—    —    (4,453)   —    4,422    (31)  
Recognition of restricted stock compensation expense —    30    —    —    —    30   
Balance at June 30, 2020 $ 103,623    $ 400,417    $ 692,240    $ 9,232    $ (69,735)   $ 1,135,777   
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S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the six months ended June 30, 2019
(dollars in thousands, except share and per share data) Common
Stock 		Additional
Paid-in
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive (Loss) Income 		Treasury
Stock 		Total
Balance at January 1, 2019 $ 90,326    $ 210,345    $ 701,819    $ (23,107)   $ (43,622)   $ 935,761   
Net income for the six months ended June 30, 2019 —    —    49,029    —    —    49,029   
Other comprehensive income, net of tax —    —    —    13,588    —    13,588   
Impact of new lease standard —    —    167    —    —    167   
Cash dividends declared ($0.54 per share)
—    —    (18,559)   —    —    (18,559)  
Treasury stock issued for restricted stock awards (83,056 shares, net of forfeitures of 50,752 shares)
—    —    (1,879)   —    988    (891)  
Repurchase of common stock (385,840 shares)
—    —    —    —    (15,122)   (15,122)  
Recognition of restricted stock compensation expense —    980    —    —    —    980   
Balance at June 30, 2019 $ 90,326    $ 211,325    $ 730,577    $ (9,519)   $ (57,756)   $ 964,953   
For the six months ended June 30, 2020
(dollars in thousands, except share and per share data) Common
Stock 		Additional
Paid-in
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive Income (Loss) 		Treasury
Stock 		Total
Balance at January 1, 2020 $ 103,623    $ 399,944    $ 761,083    $ (11,670)   $ (60,982)   $ 1,191,998   
Net (loss) income for the six months ended June 30, 2020 —    —    (19,841)   —    —    (19,841)  
Other comprehensive income, net of tax —    —    —    20,902    —    20,902   
Adoption of accounting standard - credit losses —    —    (22,590)   —    —    (22,590)  
Cash dividends declared ($0.56 per share)
—    —    (22,012)   —    —    (22,012)  
Treasury stock issued for restricted stock awards (147,054 shares, net of forfeitures of 32,448 shares)
—    —    (4,400)   —    3,806    (594)  
Repurchase of common stock (411,430 shares)
—    —    —    —    (12,559)   (12,559)  
Recognition of restricted stock compensation expense —    473    —    —    —    473   
Balance at June 30, 2020 $ 103,623    $ 400,417    $ 692,240    $ 9,232    $ (69,735)   $ 1,135,777   
See Notes to Consolidated Financial Statements


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S&T BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Six Months Ended June 30,
(dollars in thousands) 2020 2019
OPERATING ACTIVITIES
Net (loss) income $ (19,841)   $ 49,029   
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 106,809    7,854   
Provision for unfunded loan commitments —    208   
Net depreciation, amortization and accretion 1,868    2,872   
Net amortization of discounts and premiums on securities 2,189    1,562   
Stock-based compensation expense 473    980   
Gain on sale of securities (142)   —   
Gain on the sale of mortgage loans, net (2,433)   (683)  
Mortgage loans originated for sale (169,243)   (38,720)  
Proceeds from the sale of mortgage loans 162,216    33,639   
Net change in:
Interest receivable (3,201)   (1,235)  
Collateral receivable (91,736)   —   
Interest payable (1,837)   (1,582)  
Other assets (77,724)   (11,006)  
Other liabilities 61,034    15,978   
Net Cash (Used in) Provided by Operating Activities (31,568)   58,896   
INVESTING ACTIVITIES
Purchases of securities (80,292)   (9,438)  
Proceeds from maturities, prepayments and calls of securities 81,156    40,260   
Proceeds from sales of securities 1,349    —   
Net proceeds from sales of Federal Home Loan Bank stock 7,826    6,944   
Net increase in loans (491,457)   (95,691)  
Proceeds from sale of loans not originated for resale —    465   
Purchases of premises and equipment (2,862)   (2,559)  
Proceeds from the sale of premises and equipment —    9   
Net Cash Used in Investing Activities (484,280)   (60,010)  
FINANCING ACTIVITIES
Net increase in core deposits 902,933    246,561   
Net decrease in certificates of deposit (71,007)   (63,736)  
Net increase (decrease) in securities sold under repurchase agreements 72,271    (4,229)  
Net decrease in short-term borrowings (196,778)   (175,000)  
Repayments on long-term borrowings (2,864)   (523)  
Treasury shares issued-net (594)   (891)  
Cash dividends paid to common shareholders (22,012)   (18,559)  
Repurchase of common stock (12,559)   (15,122)  
Net Cash Provided by (Used in) Financing Activities 669,390    (31,499)  
Net increase (decrease) in cash and cash equivalents 153,542    (32,613)  
Cash and cash equivalents at beginning of period 197,823    155,489   
Cash and Cash Equivalents at End of Period $ 351,365    $ 122,876   
Supplemental Disclosures
Leased right-of-use operating assets and lease liabilities $ 91    $ 37,263   
Interest paid $ 29,721    $ 38,612   
Income taxes paid, net of refunds $ 210    $ 4,557   
Transfers of loans to other real estate owned $ 513    $ 215   
See Notes to Consolidated Financial Statements
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION
Principles of Consolidation
The interim Consolidated Financial Statements include the accounts of S&T Bancorp, Inc., or S&T, and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments of 20 percent to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting.
Basis of Presentation
The accompanying unaudited interim Consolidated Financial Statements of S&T have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, or SEC, on March 2, 2020. In the opinion of management, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
On June 5, 2019 we entered into an agreement to acquire DNB Financial Corporation, or DNB, and the transaction was completed on November 30, 2019. Refer to Note 2, Business Combinations for further details on the merger.
Reclassification
Amounts in prior period financial statements and footnotes are reclassified whenever necessary to conform to the current period presentation. Reclassifications had no effect on our results of operations or financial condition.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Recently Adopted Accounting Standards Updates, or ASU or Update
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the Financial Accounting Standards Board, or FASB, issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU apply to an entity that is a customer in a hosting arrangement that is a service contract. These amendments relate to accounting for implementation costs (e.g., implementation, setup and other upfront costs). These amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which costs to capitalize and which costs to expense. These amendments require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This ASU is effective for annual and interim periods beginning after December 15, 2019. We adopted this ASU on January 1, 2020. The amendments in this ASU did not materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive (Loss) Income.

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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION - continued
Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove certain disclosures from Topic 820, modify disclosures and/or require additional disclosures. The amendments in this Update required us to change our Fair Value disclosures beginning with the disclosures included in Form 10-Q for the period ended March 31, 2020. We adopted this ASU on January 1, 2020. The amendments in this ASU did not materially impact our Consolidated Balance Sheets or Consolidated Statements of Comprehensive (Loss) Income. Refer to Note 4, Fair Value Measurements.
Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step two from the goodwill impairment test. The amendments are expected to reduce the complexity and costs associated with performing the goodwill impairment test, which could result in recording impairment charges sooner. This Update is effective for any interim and annual impairment tests in reporting periods in fiscal years beginning after December 15, 2019. We adopted the amendments of this ASU on January 1, 2020. The amendments in this ASU did not have any impact on our Consolidated Balance Sheets or Consolidated Statements of Comprehensive (Loss) Income.
Financial Instruments - Credit Losses
On January 1, 2020, we adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology for determining our provision for credit losses, and allowance for credit losses, or ACL, with an expected loss methodology that is referred to as the Current Expected Credit Loss, or CECL, model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including our loans and off-balance sheet credit exposures. In addition, ASU 2016-13 made changes to the accounting for available-for-sale debt securities. Credit losses related to available-for-sale debt securities (regardless of whether the impairment is considered to be other-than-temporary) will be measured in a manner similar to the present, except that such losses will be recorded as allowances rather than as reductions in the amortized cost of the related securities.
We adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities. Accrued interest deemed uncollectible will be written off through interest income.
The majority of our available-for-sale debt securities are government agency-backed securities for which the risk of loss is minimal, and accordingly the ACL is immaterial.
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. Refer to Note 7, Allowance for Credit Losses for further discussion of these portfolio segments. Our new segmentation breaks out business banking loans from our other loan segments: Commercial Real Estate, or CRE, Commercial and Industrial, or C&I, Commercial Construction, Consumer Real Estate and Other Consumer. Business banking loans are commercial loans made to small businesses that are standard, non-complex products and evaluated through a streamlined credit approval process that has been designed to maximize efficiency while maintaining high credit quality standards.
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION - continued
The following table details the impact of ASU 2016-13 and the reclassification of loans for the identification of new portfolio loan segments under CECL:
January 1, 2020
(dollars in thousands) As Reported Under ASU 2016-13 Pre-ASU 2016-13 Impact of ASU 2016-13 Adoption
Assets:
Loans held for investment (outstanding balance)
Commercial real estate $ 2,946,319    $ 3,416,518    $ (470,199)  
Commercial and industrial 1,458,541    1,720,833    (262,292)  
Commercial construction 345,263    375,445    (30,182)  
Business banking 1,092,908    —    1,092,908   
Consumer real estate 1,235,352    1,545,323    (309,971)  
Other consumer 58,769    79,033    (20,264)  
Allowance for credit losses on loans (89,577)   (62,224)   (27,353)  
Total loans held for investment, net $ 7,047,575    $ 7,074,928    $ (27,353)  
Net deferred tax asset $ 19,317    $ 13,206    $ 6,111   
Liabilities:
Allowance for credit losses on unfunded loan commitments $ 4,462    $ 3,113    $ 1,349   
Equity:
Retained earnings $ 738,493    $ 761,083    $ (22,590)  
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. Under the previously applicable accounting guidance, a credit reserve was not recorded for acquired loans upon acquisition, however, ASU 2016-13 requires an ACL to be recognized for acquired loans similar to originated loans. 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 Form 10-K, but before the end of the first quarter of 2020. The updated information supported a loss existed at January 1, 2020. As of January 1, 2020, we recorded a cumulative-effect adjustment of $22.6 million to decrease retained earnings related to the adoption of ASU 2016-13.

Allowance for Credit Losses Policy
The ACL is a valuation reserve established and maintained by charges against operating income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period.
The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans.
The ACL for homogeneous loans is calculated using a life-time loss rate methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. The ACL model is comprised of six distinct portfolio segments: 1) Construction, 2) CRE, 3) C&I, 4) Business Banking, 5) Consumer Real Estate and 6) Other Consumer. Each segment has a distinct set of risk characteristics monitored by management. We further evaluate the ACL at a disaggregated level which includes type of collateral, loan participations, non-owner occupied and our internal risk rating system for the commercial segments and type of collateral, lien position, and FICO score, for the consumer segments. Historical credit loss experience is the basis for the estimation of expected credit losses. We apply historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on the unemployment forecast and management judgment. For periods beyond our two year reasonable and supportable forecast, we revert to the historical loss rate. We revert to historical loss rates utilizing a straight-line method over a one year reversion period. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, experience and ability of lending staff, quality of the
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION - continued
bank’s loan review system, value of underlying collateral for collateral dependent loans, the existence of and changes in concentrations and other external factors. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities.
The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all commercial loans greater than $0.5 million that meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) any commercial troubled debt restructuring, or TDR, or any loan reasonably expected to become a TDR whether on accrual or nonaccrual status and 4) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance.
Although we believe our process for determining the ACL appropriately considers all the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual losses are higher than management estimates, additional provision for credit losses could be required and could adversely affect our earnings or financial position in future periods.
Accounting Standards Issued But Not Yet Adopted
Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU apply to all employers that sponsor defined benefit pension or other postretirement plans. These amendments remove certain disclosures from Topic 715-20 and require additional disclosures. The amendments in this ASU will require S&T to update our employee benefits disclosures beginning with our Form 10-Q for the period ended March 31, 2021. The amendments in this ASU will have no impact on our consolidated financial statements.
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. The amendments in this ASU will be effective on January 1, 2021 and are not expected to have any impact on our consolidated financial statements.
Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in US GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements.
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S&T BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 1. BASIS OF PRESENTATION - continued
SEC Release No. 2020-118 - Amendments to Improve Financial Disclosures about Acquisitions and Dispositions of Businesses
In May 2020, the Securities and Exchange Commission adopted amendments to the financial disclosure requirements in Regulation S-X for acquisitions and dispositions of businesses, including real estate operations, in Rules 3-05, 3-14, 8-04, 8-05, 8-06, and Article 11, as well as in other related rules and forms. In conjunction with these changes, the Commission also amended the significance tests in the “significant subsidiary” definition in Rule 1-02(w), Securities Act Rule 405, and Exchange Act Rule 12b-2 to improve their application and to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant. In addition, to address the unique attributes of investment companies and business development companies, the Commission adopted new requirements regarding fund acquisitions specific to registered investment companies and business development companies. The amendments in this final rule are effective beginning January 1, 2021. We are evaluating the impact of this final rule and we expect these amendments to impact disclosures in our consolidated financial statements relating to any future acquisitions and disposition of businesses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued



NOTE 2. BUSINESS COMBINATIONS
On November 30, 2019, we completed our acquisition of DNB Financial Corporation, or DNB, and DNB First National Association, its wholly-owned bank subsidiary, located in Downingtown, Pennsylvania. The acquisition of DNB expanded our Eastern Pennsylvania market by adding 14 banking locations, in an all-stock transaction structured as a merger of DNB with and into S&T, with S&T being the surviving entity. The related systems conversion of DNB into S&T Bank occurred on February 7, 2020.
DNB shareholders received, without interest, 1.22 shares of S&T common stock for each share of DNB common stock. The total purchase price was approximately $201.0 million, which included $0.4 million of cash and 5,318,964 S&T common shares at a fair value of $37.72 per share. The fair value of $37.72 per share of S&T common stock was based on the November 30, 2019 closing price.
The Merger was accounted for under the acquisition method of accounting and our Consolidated Financial Statements include all DNB Bank transactions beginning on December 1, 2019. Goodwill of $85.8 million at June 30, 2020 was calculated as the excess of the consideration exchanged over the fair value of the identifiable net assets acquired. All of the goodwill was assigned to our Community Banking segment. The goodwill recognized is not deductible for tax purposes.
The following table provides a summary of the assets acquired and liabilities assumed from DNB, the preliminary estimates of the fair value adjustments necessary to adjust those acquired assets and assumed liabilities to estimated fair value and the preliminary estimates of the resultant fair values of those assets and liabilities by S&T at November 30, 2019, the acquisition date. Preliminary estimates were adjusted by $1.7 million during the six months ended June 30, 2020. These measurement period adjustments primarily related to $2.4 million reduction in the fair value of loans, $0.3 million reduction in the fair value of borrowings and $0.3 million in deferred income taxes. As information becomes known, additional fair value adjustments to loans, other real estate owned, or OREO, and income taxes may be recognized during the measurement period, which may not extend beyond one year following the acquisition.
The following table presents the preliminary fair value adjustments and the measurement period adjustments as of the dates presented:
November 30, 2019 June 30, 2020
As Recorded by DNB Preliminary Fair Value Adjustments As Recorded by S&T Measurement Period Adjustments As Recorded by S&T
Fair Value of Assets Acquired
Cash and cash equivalents $ 64,119    $ —    $ 64,119    $ —    $ 64,119   
Securities and other investments 108,715    183    108,898    —    108,898   
Loans 917,127    (8,143)   908,984    (2,377)   906,607   
Allowance for credit losses (6,487)   6,487    —    —    —   
Goodwill 15,525    (15,525)   —    —    —   
Premises and equipment 6,782    8,090    14,872    —    14,872   
Accrued interest receivable 4,138    —    4,138    —    4,138   
Deferred income taxes 2,017    (3,298)   (1,281)   311    (970)  
Core deposits and other intangible assets 269    (269)   —    —    —   
Other assets 24,883    (4,278)   20,605    74    20,679   
Total Assets Acquired 1,137,088    (16,753)   1,120,335    (1,992)   1,118,343   
Fair Value of Liabilities Assumed
Deposits 966,263    1,002    967,265    —    967,265   
Borrowings 37,617    (276)   37,341    (257)   37,084   
Accrued interest payable and other liabilities 11,157    (3,184)   7,973    (68)   7,905   
Total Liabilities Assumed 1,015,037    (2,458)   1,012,579    (325)   1,012,254   
Total Net Assets Acquired $ 122,051    $ (14,295)   $ 107,756    $ (1,667)   $ 106,089   
Core Deposit Intangible Asset $ 7,288    $ —    $ 7,288   
Wealth Management Intangible Asset 1,772    —    1,772   
Total Fair Value of Net Assets Acquired and Identified $ 116,816    $ (1,667)   $ 115,149   
Consideration Paid
Cash $ 360    $ —    $ 360   
Common stock 200,631    —    200,631   
Fair Value of Total Consideration $ 200,991    $ —    $ 200,991   
Goodwill $ 84,175    $ 1,667    $ 85,842   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 2. BUSINESS COMBINATIONS – continued
Loans acquired in the Merger were recorded at fair value with no carryover of the related ACL from DNB. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The preliminary fair value of the loans acquired was estimated at $909.0 million, net of a $10.5 million discount. The discount is accreted to interest income over the remaining contractual life of the loans. During the six month period ended June 30, 2020, the fair value of acquired loans was reduced by an additional $2.5 million as we continue to finalize our evaluation of the loan portfolio.
As of June 30, 2020, direct costs related to the DNB merger of $13.7 million were recognized and expensed as incurred. During the six months ended June 30, 2020, we recognized $2.3 million of merger related expenses including $0.2 million in legal and professional fees, $1.4 million in severance payments and stay-bonuses, $0.4 million for data processing and $0.3 million in other expenses. As of December 31, 2019, we recognized $11.4 million of merger related expenses, including $4.7 million for data processing contract termination and system conversion costs, $2.8 million in legal and professional expenses, $3.4 million in severance payments and $0.5 million in other expenses.
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NOTE 3. (LOSS) EARNINGS PER SHARE
Diluted (loss) earnings per share is calculated using both the two-class and the treasury stock methods with the more dilutive method used to determine diluted earnings per share. The following table reconciles the numerators and denominators of basic and diluted (loss) earnings per share calculations for the periods presented.
  Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except share and per share data) 2020 2019 2020 2019
Numerator for (Loss) Earnings per Share—Basic:
Net (loss) income $ (33,072)   $ 26,101    $ (19,841)   $ 49,029   
Less: Income allocated to participating shares —    72    —    137   
Net (Loss) Income Allocated to Shareholders $ (33,072)   $ 26,029    $ (19,841)   $ 48,892   
Numerator for (Loss) Earnings per Share—Diluted:
Net (loss) income $ (33,072)   $ 26,101    $ (19,841)   $ 49,029   
Net (Loss) Income Available to Shareholders $ (33,072)   $ 26,101    $ (19,841)   $ 49,029   
Denominators for (Loss) Earnings per Share:
Weighted Average Shares Outstanding—Basic 39,013,161    34,158,136    39,142,351    34,298,185   
Add: Potentially dilutive shares —    52,850    —    88,121   
Denominator for Treasury Stock Method—Diluted 39,013,161    34,210,986    39,142,351    34,386,306   
Weighted Average Shares Outstanding—Basic 39,013,161    34,158,136    39,142,351    34,298,185   
Add: Average participating shares outstanding —    93,433    —    96,261   
Denominator for Two-Class Method—Diluted 39,013,161    34,251,569    39,142,351    34,394,446   
(Loss) Earnings per share—basic $ (0.85)   $ 0.76    $ (0.51)   $ 1.43   
(Loss) Earnings per share—diluted $ (0.85)   $ 0.76    $ (0.51)   $ 1.43   
Restricted stock considered anti-dilutive excluded from potentially dilutive shares 21,333    5,183    82,624    44,153   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued




NOTE 4. FAIR VALUE MEASUREMENTS
We use fair value measurements when recording and disclosing certain financial assets and liabilities. Debt securities, equity securities and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, loans held for investment, OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data that we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.
Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.
The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.
Recurring Basis
Available-for-Sale Debt Securities
We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing services which provide us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market valuation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases and extensive quality control programs.

Equity Securities
Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded and do not have a quotable market are classified as Level 3.
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NOTE 4. FAIR VALUE MEASUREMENTS - continued
Deferred Compensation Plan Assets
We use quoted market prices to determine the fair value of our equity security assets. These securities are reported at fair value with the gains and losses included in noninterest income in our Consolidated Statements of Comprehensive (Loss) Income. These assets are held in a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Deferred compensation plan assets are reported in other assets in the Consolidated Balance Sheets.
Derivative Financial Instruments
We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2. We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparties’ nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings.
Nonrecurring Basis
Loans Held for Sale
Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans are transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3.
Loans Held for Investment
Loans that are individually evaluated to determine whether a specific allocation of ACL is needed are reported at fair value. Fair value is determined using the following methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Loans carried at fair value are classified as Level 3.
OREO and Other Repossessed Assets
OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value are classified as Level 3.
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NOTE 4. FAIR VALUE MEASUREMENTS - continued
Mortgage Servicing Rights
The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into mortgage banking income in the Consolidated Statements of Comprehensive (Loss) Income.
Other Assets
We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.
Financial Instruments
In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and a willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits, approximate fair value.
Loans
The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
Bank Owned Life Insurance
Fair value approximates net cash surrender value of bank owned life insurance, or BOLI.
Federal Home Loan Bank, or FHLB, and Other Restricted Stock
It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value.
Collateral Receivable
The carrying amount included in Other Assets on our Consolidated Balance Sheets approximates fair value.
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NOTE 4. FAIR VALUE MEASUREMENTS - continued
Deposits
The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.
Short-Term Borrowings
The carrying amounts of securities sold under repurchase agreements, or REPOs, and other short-term borrowings approximate their fair values.
Long-Term Borrowings
The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.
Junior Subordinated Debt Securities
The interest rate on the variable rate junior subordinated debt securities is reset quarterly; therefore, the carrying values approximate their fair values.
Loan Commitments and Standby Letters of Credit
Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
Other
Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. FAIR VALUE MEASUREMENTS - continued
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at June 30, 2020 and December 31, 2019. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.
June 30, 2020
(dollars in thousands) Level 1 Level 2 Level 3 Total
ASSETS
Available-for-sale debt securities:
U.S. Treasury securities
$ —    $ 10,355    $ —    $ 10,355   
Obligations of U.S. government corporations and agencies —    163,703    —    163,703   
Collateralized mortgage obligations of U.S. government corporations and agencies —    181,162    —    181,162   
Residential mortgage-backed securities of U.S. government corporations and agencies —    19,768    —    19,768   
Commercial mortgage-backed securities of U.S. government corporations and agencies —    284,550    —    284,550   
Corporate obligations —    5,038    —    5,038   
Obligations of states and political subdivisions —    137,127    —    137,127   
Total Available-for-sale Debt Securities —    801,703    —    801,703   
Marketable equity securities 2,602    61    —    2,663   
Total Securities 2,602    801,764    —    804,366   
Securities held in a deferred compensation plan 5,489    —    —    5,489   
Derivative financial assets:
Interest rate swaps —    94,371    —    94,371   
Interest rate lock commitments —    2,583    —    2,583   
Total Assets $ 8,091    $ 898,718    $ —    $ 906,809   
LIABILITIES
Derivative financial liabilities:
Interest rate swaps $ —    $ 94,286    $ —    $ 94,286   
Forward sale contracts —    594    —    594   
Total Liabilities $ —    $ 94,880    $ —    $ 94,880   
December 31, 2019
(dollars in thousands) Level 1 Level 2 Level 3 Total
ASSETS
Available-for-sale debt securities:
U.S. Treasury securities $ —    $ 10,040    $ —    $ 10,040   
Obligations of U.S. government corporations and agencies —    157,697    —    157,697   
Collateralized mortgage obligations of U.S. government corporations and agencies —    189,348    —    189,348   
Residential mortgage-backed securities of U.S. government corporations and agencies —    22,418    —    22,418   
Commercial mortgage-backed securities of U.S. government corporations and agencies —    275,870    —    275,870   
Corporate Bonds —    7,627    —    7,627   
Obligations of states and political subdivisions —    116,133    —    116,133   
Total Available-for-Sale Debt Securities —    779,133    —    779,133   
Marketable equity securities 5,078    72    —    5,150   
Total Securities 5,078    779,205    —    784,283   
Securities held in a deferred compensation plan 5,987    —    —    5,987   
Derivative financial assets:
Interest rate swaps —    25,647    —    25,647   
Interest rate lock commitments —    321    —    321   
Forward sale contracts —    1    —    1   
Total Assets $ 11,065    $ 805,174    $ —    $ 816,239   
LIABILITIES
Derivative financial liabilities:
Interest rate swaps $ —    $ 25,615    $ —    $ 25,615   
Total Liabilities $ —    $25,615 $— $25,615
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NOTE 4. FAIR VALUE MEASUREMENTS - continued
Assets Recorded at Fair Value on a Nonrecurring Basis
We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either June 30, 2020 or December 31, 2019.
For Level 3 assets measured at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
June 30, 2020 Valuation Technique Significant Unobservable Inputs Range
Weighted Average (1) (2) (3)
(dollars in thousands)
Loans held for investment $ 61,068    Collateral method Costs to sell 0% - 17% 6.81%
Discounted cash flow method Discount rate 3.25% 3.25%
Other real estate owned 2,413    Collateral method Costs to sell 0% - 7.00% 4.52%
Mortgage servicing rights $ 4,278    Discounted cash flow method Discount rate 9.33% - 12.55% 9.44%
Constant prepayment rates 7.59% - 13.58% 12.95%
Total Assets $ 67,759   
December 31, 2019 Valuation Technique Significant Unobservable Inputs Range
Weighted Average (1) (2) (3)
(dollars in thousands)
Loans held for investment $ 38,697    Collateral method Costs to sell 0% - 20% 8.55%
Discounted cash flow method Discount rate 4.75% - 5.50% 5.28%
Other real estate owned 3,231    Collateral method Costs to sell 7.00% 7.00%
Mortgage servicing rights $ 1,134    Discounted cash flow method Discount rate 9.39% - 12.54% 9.49%
Constant prepayment rates 7.46% - 12.74% 9.73%
Total Assets $ 43,062   
(1) Weighted averages for loans held for investment were weighted by loan amounts.
(2) Weighted averages for other real estate owned were weighted by OREO balances.
(3) Weighted averages for mortgage services rights discount rate and prepayment rates are based on note rate tranches and voluntary constant prepayment rates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 4. FAIR VALUE MEASUREMENTS - continued
The carrying values and fair values of our financial instruments at June 30, 2020 and December 31, 2019 are presented in the following tables:
 
Carrying
Value(1)
Fair Value Measurements at June 30, 2020
(dollars in thousands) Total Level 1 Level 2 Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits $ 351,365    $ 351,365    $ 351,365    $ —    $ —   
Securities 804,366    804,366    2,602    801,764    —   
Loans held for sale 14,259    14,072    —    —    14,072   
Portfolio loans, net 7,433,949    7,422,797    —    —    7,422,797   
Bank owned life insurance 81,443    81,443    —    81,443    —   
FHLB and other restricted stock 15,151    15,151    —    —    15,151   
Collateral receivable 91,736    91,736    91,736    —    —   
Securities held in a deferred compensation plan 5,489    5,489    5,489    —    —   
Mortgage servicing rights 4,279    4,279    —    —    4,279   
Interest rate swaps 94,371    94,371    —    94,371    —   
Interest rate lock commitments 2,583    2,583    —    2,583    —   
LIABILITIES
Deposits $ 7,867,916    $ 7,874,298    $ 6,344,076    $ 1,530,222    $ —   
Securities sold under repurchase agreements 92,159    92,159    92,159    —    —   
Short-term borrowings 84,541    84,541    84,541    —    —   
Long-term borrowings 49,489    50,538    4,585    45,953    —   
Junior subordinated debt securities 64,053    64,053    64,053    —    —   
Interest rate swaps 94,286    94,286    —    94,286    —   
Forward sales contracts 594    594    —    594    —   
(1) As reported in the Consolidated Balance Sheets
 
Carrying
Value(1)
Fair Value Measurements at December 31, 2019
(dollars in thousands) Total Level 1 Level 2 Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits $ 197,823    $ 197,823    $ 197,823    $ —    $ —   
Securities 784,283    784,283    5,078    779,205    —   
Loans held for sale 5,256    5,256    —    —    5,256   
Portfolio loans, net 7,074,928    6,940,875    —    —    6,940,875   
Bank owned life insurance 80,473    80,473    —    80,473    —   
FHLB and other restricted stock 22,977    22,977    —    —    22,977   
Securities held in a Deferred Compensation Plan 5,987    5,987    5,987    —    —   
Mortgage servicing rights 4,662    4,650    —    —    4,650   
Interest rate swaps 25,647    25,647    —    25,647    —   
Interest rate lock commitments 321    321    —    321    —   
Forward sale contracts 1    1    —    1    —   
LIABILITIES
Deposits $ 7,036,576    $ 7,034,595    $ 5,441,143    $ 1,593,452    $ —   
Securities sold under repurchase agreements 19,888    19,888    19,888    —    —   
Short-term borrowings 281,319    281,319    281,319    —    —   
Long-term borrowings 50,868    51,339    4,678    46,661    —   
Junior subordinated debt securities 64,277    64,277    64,277    —    —   
Interest rate swaps 25,615    25,615    —    25,615    —   
(1) As reported in the Consolidated Balance Sheets
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. SECURITIES

The following table presents the fair values of our securities portfolio at the dates presented:
(dollars in thousands) June 30, 2020 December 31, 2019
Available-for-sale debt securities $ 801,703    $ 779,133   
Marketable equity securities 2,663    5,150   
Total Securities $ 804,366    $ 784,283   
Available-for-Sale Debt Securities
The following tables present the amortized cost and fair value of available-for-sale debt securities as of the dates presented:
  June 30, 2020 December 31, 2019
(dollars in thousands) Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value 		Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
U.S. Treasury securities $ 9,975    $ 380    $ —    $ 10,355    $ 9,969    $ 71    $ —    $ 10,040   
Obligations of U.S. government corporations and agencies 158,869    4,835    (1)   163,703    155,969    1,773    (45)   157,697   
Collateralized mortgage obligations of U.S. government corporations and agencies 172,938    8,224    —    181,162    186,879    2,773    (304)   189,348   
Residential mortgage-backed securities of U.S. government corporations and agencies 18,891    877    —    19,768    22,120    321    (23)   22,418   
Commercial mortgage-backed securities of U.S. government corporations and agencies 269,673    14,877    —    284,550    273,771    2,680    (581)   275,870   
Corporate obligations 5,026    12    —    5,038    7,603    24    —    7,627   
Obligations of states and political subdivisions 130,002    7,125    —    137,127    112,116    4,017    —    116,133   
Total Available-for-Sale Debt Securities (1)
$ 765,374    $ 36,330    $ (1)   $ 801,703    $ 768,427    $ 11,659    $ (953)   $ 779,133   
(1) Excludes interest receivable of $3.4 million at June 30, 2020 and $3.4 million at December 31, 2019. Interest receivable is included in other assets in the consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. SECURITIES – continued
The following tables present the fair value and the age of gross unrealized losses on available-for-sale debt securities by investment category as of the dates presented:
  June 30, 2020
  Less Than 12 Months 12 Months or More Total
(dollars in thousands) Number of Securities Fair Value Unrealized
Losses 		Number of Securities Fair Value Unrealized
Losses 		Number of Securities Fair Value Unrealized
Losses
U.S. Treasury securities — $ —    $ —    — $ —    $ —    — $ —    $ —   
Obligations of U.S. government corporations and agencies 1 49,990    (1)   — —    —    1 49,990    (1)  
Collateralized mortgage obligations of U.S. government corporations and agencies 1 1    —    — —    —    1 1    —   
Residential mortgage-backed securities of U.S. government corporations and agencies — —    —    — —    —    — —    —   
Commercial mortgage-backed securities of U.S. government corporations and agencies — —    —    — —    —    — —    —   
Corporate bonds — —    —    — —    —    — —    —   
Obligations of states and political subdivisions — —    —    — —    —    — —    —   
Total 2 $ 49,991    $ (1)   — $ —    $ —    2 $ 49,991    $ (1)  
  December 31, 2019
  Less Than 12 Months 12 Months or More Total
(dollars in thousands) Number of Securities Fair Value Unrealized
Losses 		Number of Securities Fair Value Unrealized
Losses 		Number of Securities Fair Value Unrealized
Losses
U.S. Treasury securities — $ —    $ —    — $ —    $ —    — $ —    $ —   
Obligations of U.S. government corporations and agencies 3 22,638    (45)   — —    —    3 22,638    (45)  
Collateralized mortgage obligations of U.S. government corporations and agencies 6 23,393    (73)   6 25,254    (231)   12 48,647    (304)  
Residential mortgage-backed securities of U.S. government corporations and agencies 1 982    (2)   1 2,534    (21)   2 3,516    (23)  
Commercial mortgage-backed securities of U.S. government corporations and agencies 9 90,005    (581)   — —    —    9 90,005    (581)  
Corporate bonds 1 79    —    — —    —    1 79    —   
Obligations of states and political subdivisions — —    —    — —    —    — —    —   
Total Temporarily Impaired Debt Securities 20 $ 137,097    $ (701)   7 $ 27,788    $ (252)   27 $ 164,885    $ (953)  
We evaluate quarterly securities with unrealized losses to determine if the decline in fair value has resulted from credit losses or other factors. There were two debt securities in an unrealized loss position at June 30, 2020 and 27 debt securities in an unrealized loss position at December 31, 2019. We do not intend to sell and it is more likely than not that we will not be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost. The unrealized losses on debt securities were attributable to changes in interest rates and not related to the credit quality of these issuers. All debt securities were determined to be investment grade and paying principal and interest according to the contractual terms of the security. We concluded that the allowance for credit losses for debt securities was immaterial at June 30, 2020. Prior to the adoption of ASU 2016-13 there was no other than temporary impairment, or OTTI, recorded during the six months ended June 30, 2019.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 5. SECURITIES – continued
The following table presents net unrealized gains and losses, net of tax, on available-for-sale debt securities included in accumulated other comprehensive income/(loss), for the periods presented:
June 30, 2020 December 31, 2019
(dollars in thousands) Gross Unrealized Gains Gross Unrealized Losses Net Unrealized Gains/(Losses) Gross Unrealized Gains Gross Unrealized Losses Net Unrealized Gains/(Losses)
Total unrealized gains/(losses) on available-for-sale debt securities $ 36,330    $ (1)   $ 36,329    $ 11,659    $ (953)   $ 10,706   
Income tax (expense) benefit (7,736)   —    (7,736)   (2,486)   203    (2,283)  
Net Unrealized Gains/(Losses), Net of Tax Included in Accumulated Other Comprehensive Income/(Loss) $ 28,594    $ (1)   $ 28,593    $ 9,173    $ (750)   $ 8,423   
The amortized cost and fair value of available-for-sale debt securities at June 30, 2020 by contractual maturity are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
  June 30, 2020
(dollars in thousands) Amortized
Cost 		Fair Value
Obligations of the U.S. Treasury, U.S. government corporations and agencies, and obligations of states and political subdivisions
Due in one year or less $ 106,927    $ 107,417   
Due after one year through five years 105,757    111,561   
Due after five years through ten years 55,138    58,778   
Due after ten years 31,024    33,429   
Available-for-Sale Debt Securities With Maturities 298,846    311,185   
Collateralized mortgage obligations of U.S. government corporations and agencies 172,938    181,162   
Residential mortgage-backed securities of U.S. government corporations and agencies 18,891    19,768   
Commercial mortgage-backed securities of U.S. government corporations and agencies 269,673    284,550   
Corporate Securities 5,026    5,038   
Total Available-for-Sale Debt Securities $ 765,374    $ 801,703   
Debt securities with carrying values of $340.6 million at June 30, 2020 and $286.0 million at December 31, 2019 were pledged for various regulatory and legal requirements.
Marketable Equity Securities
The following table presents realized and unrealized net gains and losses for our marketable equity securities for the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2020 2019 2020 2019
Marketable Equity Securities
Net gains and losses recognized during the period on equity securities $ 448    $ 52    $ (1,137)   $ (266)  
Less: Net gains and losses recognized during the period on equity securities sold during the period 142    —    142    —   
Unrealized Losses/Gains Recognized During the Reporting Period on Equity Securities Still Held at the Reporting Date $ 306    $ 52    $ (1,279)   $ (266)  
Total unrealized gains and losses on marketable equity securities recognized during the current period are included in other noninterest income on the Consolidated Statements of Comprehensive (Loss) Income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued


NOTE 6. LOANS AND LOANS HELD FOR SALE

Loans are presented net of unearned income of $16.7 million at June 30, 2020 and $4.6 million at December 31, 2019 and net of a discount related to purchase accounting fair value adjustments of $10.5 million at June 30, 2020 and $12.3 million at December 31, 2019. The following table presents loans as of the dates presented:
(dollars in thousands) June 30, 2020 December 31, 2019
Commercial
Commercial real estate $ 3,345,513    $ 3,416,518   
Commercial and industrial 2,140,355    1,720,833   
Commercial construction 459,264    375,445   
Total Commercial Loans 5,945,132    5,512,796   
Consumer
Residential mortgage 971,023    998,585   
Home Equity 539,519    538,348   
Installment and other consumer 79,816    79,033   
Consumer construction 13,068    8,390   
Total Consumer Loans 1,603,426    1,624,356   
Total Portfolio Loans 7,548,558    7,137,152   
Loans held for sale 14,259    5,256   
Total Loans(1)
$ 7,562,817    $ 7,142,408   
(1) Excludes interest receivable of $25.4 million at June 30, 2020 and $22.1 million at December 31, 2019. Interest receivable is included in other assets in the consolidated balance sheets.
Commercial and industrial loans, or C&I, included $547.6 million of loans originated under the Paycheck Protection Program, or PPP, at June 30, 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law. The CARES Act included the PPP, a program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted expenses in accordance with the requirements of the PPP. The loans are 100 percent guaranteed by the SBA. These loans carry a fixed rate of 1.00 percent and a term of two years, or five years for loans approved by the Small Business Administration, or SBA, on or after June 5, 2020. Payments are deferred for at least six months of the loan. The SBA pays us a processing fee ranging from 1 percent to 5 percent based on the size of the loan. Interest is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income over the life of the loan using the level yield method. When a PPP loan is paid off or forgiven by the SBA, the remaining unaccreted or unamortized net origination fees or costs will be immediately recognized into income.
We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by reviewing the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments. Total commercial loans represented 78.8 percent of total portfolio loans at June 30, 2020 and 77.2 percent at December 31, 2019. Within our commercial portfolio, the CRE and Commercial Construction portfolios combined comprised $3.8 billion, or 64.0 percent, of total commercial loans at June 30, 2020 and $3.8 billion, or 68.8 percent, of total commercial loans at December 31, 2019 and 50.4 percent of total portfolio loans at June 30, 2020 and 53.1 percent at December 31, 2019. Further segmentation of the CRE and commercial construction portfolios by collateral type reveals no concentration in excess of 14 percent of both total CRE and commercial construction loans at June 30, 2020 and 11 percent at December 31, 2019.
We lend primarily in Pennsylvania and the contiguous states of Ohio, New York, West Virginia and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this geography, resulting in a concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data and information supplied by our customers. We also use subscription services for additional geographic and industry specific information. Our CRE and commercial construction portfolios have exposure outside of this geography of 5.7 percent of the combined portfolios and 3.0 percent of total portfolio loans at June 30, 2020. This compares to 5.4 percent of the combined portfolios and 2.9 percent of total portfolio loans at December 31, 2019.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued
We individually evaluate all substandard and nonaccrual commercial loans that have experienced a forbearance or change in terms agreement, and all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan, to determine if they should be designated as troubled debt restructurings, or TDRs.
All TDRs will be reported as such 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 fully expected that the remaining principal and interest will be collected according to the restructured agreement. TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.
The following tables summarize restructured loans as of the dates presented:
  June 30, 2020
(dollars in thousands) Performing
TDRs 		Nonperforming
TDRs 		Total
TDRs
Commercial real estate $ 25    $ 27,100    $ 27,125   
Commercial and industrial 4,388    2,068    6,456   
Commercial construction 3,997    —    3,997   
Business banking 1,488    349    1,837   
Consumer real estate 5,635    2,238    7,873   
Other consumer 3    —    3   
Total(1)
$ 15,536    $ 31,755    $ 47,291   
(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 Instruments.
  December 31, 2019
(dollars in thousands) Performing
TDRs 		Nonperforming
TDRs 		Total
TDRs
Commercial real estate $ 22,233    $ 6,713    $ 28,946   
Commercial and industrial 6,909    695    7,604   
Commercial construction 1,425    —    1,425   
Residential mortgage 2,013    822    2,835   
Home equity 4,371    678    5,049   
Installment and other consumer 9    4    13   
Total $ 36,960    $ 8,912    $ 45,872   
The significant increases in nonperforming TDRs at June 30, 2020 compared to December 31, 2019 was primarily related to a $20.5 million CRE relationship and a $4.3 million C&I relationship. The $20.5 million CRE relationship became a performing TDR in the third quarter of 2019 and then moved to nonperforming in the first quarter of 2020 when the borrower experienced financial deterioration that lead to cash flow issues. The relationship was individually assessed at June 30, 2020, and based upon updated appraisals, a $0.6 million ACL was added due to the relationship being under-collateralized as of June 30, 2020.
There were four TDRs totaling $0.1 million that returned to accruing status during the three and six months ended June 30, 2020. There were three TDRs totaling $0.1 million that returned to accruing status during the three months ended June 30, 2019 and four TDRs totaling $1.8 million that returned to accruing status during the six months ended June 30, 2019.
The following tables present the restructured loans by portfolio segment and by type of concession for the three and six months ended June 30, 2020:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued
  Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
(dollars in thousands) Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment(1)
Post-Modification
Outstanding
Recorded
Investment(1)
Total  Difference
in Recorded
Investment 		Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment(1)
Post-Modification
Outstanding
Recorded
Investment(1)
Total  Difference
in Recorded
Investment
Totals by Loan Segment
Commercial Real Estate
Principal deferral and maturity date extension —    —    —    —    1    2,210    2,210    —   
Total Commercial Real Estate —    —    —    —    1    2,210    2,210    —   
Commercial and Industrial
Maturity date extension and interest rate reduction 1    75    75    —    1    75    75    —   
Principal deferral and maturity date extension —    —    —    —    1    2,467    2,068    (399)  
Payment deferral resulting in payment delay 1    93    27    —    (66)   1    93    27    (66)  
Total Commercial and Industrial 2    168    102    (66)   3    2,635    2,170    (465)  
Commercial Construction
Maturity date extension 2    701    701    —    3    2,592    2,572    (20)  
Total Commercial Construction 2    701    701    —    3    2,592    2,572    (20)  
Residential Mortgage
Consumer bankruptcy(2)
1    160    160    —    1    160    160    —   
Maturity date extension and payment reduction 2    150    150    —    3    177    177    —   
Total Residential Mortgage 3    310    310    —    4    337    337    —   
Home Equity
Consumer bankruptcy(2)
4    191    191    —    9    567    564    (3)  
Total Home Equity 4    191    191    —    9    567    564    (3)  
Totals by Concession Type
Principal deferral and maturity date extension —    —    —    —    2    4,677    4,278    (399)  
Maturity date extension and interest rate reduction 1    75    75    —    1    75    75    —   
Payment deferral resulting in payment delay 1    93    27    (66)   1    93    27    (66)  
Maturity date extension 2    701    701    —    3    2,592    2,572    (20)  
Consumer bankruptcy(2)
5    351    351    —    10    727    724    (3)  
Maturity date extension and payment reduction 2    150    150    —    3    177    177    —   
Total(3)
11    $ 1,370    $ 1,304    $ (66)   20    $ 8,341    $ 7,853    $ (488)  
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end.
(2) Consumer bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.
(3) 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 Instruments.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued
The following tables present the restructured loans by portfolio segment and by type of concession for the three and six months ended June 30, 2019:
  Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
(dollars in thousands) Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment(1)
Post-Modification
Outstanding
Recorded
Investment(1)
Total  Difference
in Recorded
Investment 		Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment(1)
Post-Modification
Outstanding
Recorded
Investment(1)
Total  Difference
in Recorded
Investment
Totals by Loan Segment
Commercial Real Estate
Maturity date extension 1    1,322    1,311    (11)   1    1,322    1,311    (11)  
Maturity date extension and interest rate reduction 1    151    148    (3)   1    151    148    (3)  
Principal forgiveness 1    4,690    4,631    (59)   1    4,690    4,631    (59)  
Total Commercial Real Estate 3    6,163    6,090    (73)   3    6,163    6,090    (73)  
Commercial and Industrial
Maturity date extension and interest rate reduction —    —    —    —    1    4,751    4,529    (222)  
Total Commercial and Industrial —    —    —    —    1    4,751    4,529    (222)  
Commercial Construction
Total Commercial Construction —    —    —    —    —    —    —    —   
Residential Mortgage
Consumer bankruptcy(2)
2    116    115    (1)   3    166    163    (3)  
Total Residential Mortgage 2    116    115    (1)   3    166    163    (3)  
Home Equity
Consumer bankruptcy(2)
6    107    105    (2)   13    298    268    (30)  
Interest rate reduction 1    109    108    (1)   2    190    189    (1)  
Total Home Equity 7    216    213    (3)   15    488    457    (31)  
Installment and Other Consumer
Consumer bankruptcy(2)
2    9    9    —    3    9    9    —   
Total Installment and Other Consumer $ 2    $ 9    $ 9    $ —    $ 3    $ 9    $ 9    $ —   
Totals by Concession Type
Maturity date extension 1    1,322    1,311    (11)   1    1,322    1,311    (11)  
Maturity date extension and interest rate reduction 1    151    148    (3)   2    4,902    4,677    (225)  
Principal forgiveness 1    4,690    4,631    (59)   1    4,690    4,631    (59)  
Consumer bankruptcy(2)
10    232    229    (3)   19    473    440    (33)  
Interest rate reduction 1    109    108    (1)   2    190    189    (1)  
Total(3)
14    $ 6,504    $ 6,427    $ (77)   25    $ 11,577    $ 11,248    $ (329)  
(1) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification balance represents the outstanding balance at period end.
(2) Consumer bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed.
(3) 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 Instruments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 6. LOANS AND LOANS HELD FOR SALE - continued
In response to the coronavirus, or COVID-19, pandemic and its economic impact on our customers, we implemented a short-term modification program that complies with the CARES Act to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments for 90 days and up to a maximum of 180 days for our commercial customers. The customer remains responsible for deferred payments along with any additional interest accrued during the deferral period. For our consumer customers interest does not accrue during the deferral period and the maturity date is extended by the length of the deferral period. Under the applicable guidance, none of these loans were considered restructured as of June 30, 2020. As of June 30, 2020 we had 2,360 loans that were modified totaling $1.4 billion.
As of June 30, 2020, we had 22 commitments to lend an additional $3.1 million on TDRs. Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place. There was one TDR that defaulted during the three months ended June 30, 2020 totaling $0.1 million and 11 TDRs totaling $21.1 million that defaulted during the six months ended June 30, 2020 that were restructured within the last 12 months prior to defaulting. The large increase in defaulted TDRs is related to one CRE customer with five notes totaling $20.5 million discussed above. There were no TDRs that defaulted during the three and six months ended June 30, 2019 that were restructured within the last 12 months prior to defaulting.
The following table is a summary of nonperforming assets as of the dates presented:
Nonperforming Assets
(dollars in thousands) June 30, 2020 December 31, 2019
Nonperforming Assets
Nonaccrual loans $ 58,358    $ 45,145   
Nonaccrual TDRs 31,755    8,912   
Total Nonaccrual Loans 90,113    54,057   
OREO 2,740    3,525   
Total Nonperforming Assets $ 92,853    $ 57,582   

The significant increases in nonperforming loans primarily related to the addition of a $20.5 million CRE relationship, the $10.9 million lending relationship related to the customer fraud and a $4.3 million C&I relationship. The $20.5 million CRE relationship became a performing TDR in the third quarter of 2019 and then moved to nonperforming in the first quarter of 2020 when the borrower experienced financial deterioration that led to cash flow issues. The relationship was individually assessed at June 30, 2020, and based upon updated appraisals, a $0.6 million ACL was added due to the relationship being under-collateralized as of June 30, 2020. The $10.9 million lending relationship was moved to nonperforming in the second quarter of 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 7. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued
NOTE 7. ALLOWANCE FOR CREDIT LOSSES – continued
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   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued


NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Interest Rate Swaps
In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the balance sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which we enter into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate loan with us receiving a variable rate. These agreements could have floors or caps on the contracted interest rates.
Pursuant to our agreements with various financial institutions, we may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon our current positions and related future collateral requirements relating to them, we believe any effect on our cash flow or liquidity position to be immaterial.
Derivatives contain an element of credit risk, the possibility that we will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by our Asset and Liability Committee, or ALCO, and derivatives with customers may only be executed with customers within credit exposure limits approved by our Senior Loan Committee. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Comprehensive (Loss) Income.
Interest Rate Lock Commitments and Forward Sale Contracts
In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan market. We also offer interest rate lock commitments to potential borrowers. The commitments are generally for a period of 60 days and guarantee a specified interest rate for a loan if underwriting standards are met, but the commitment does not obligate the potential borrower to close on the loan. Accordingly, some commitments expire prior to becoming loans. We may encounter pricing risks if interest rates increase significantly before the loan can be closed and sold. We may utilize forward sale contracts in order to mitigate this pricing risk. Whenever a customer desires these products, a mortgage originator quotes a secondary market rate guaranteed for that day by the investor. The rate lock is executed between the mortgagee and us and in turn a forward sale contract may be executed between us and the investor. Both the rate lock commitment and the corresponding forward sale contract for each customer are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives during the commitment period are recorded in current earnings and included in mortgage banking in the Consolidated Statements of Comprehensive (Loss) Income.
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NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – continued
        The following table indicates the amounts representing the value of derivative assets and derivative liabilities as of the dates presented:
  Derivatives
(included in Other Assets) 		Derivatives
(included in Other Liabilities)
(dollars in thousands) June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019
Derivatives not Designated as Hedging Instruments:
Interest Rate Swap Contracts - Commercial Loans
Fair value $ 94,371    $ 25,647    $ 94,286    $ 25,615   
Notional amount 930,074    740,762    930,074    740,762   
Collateral posted —    —    91,730    26,127   
Interest Rate Lock Commitments - Mortgage Loans
Fair value 2,583    321    —    —   
Notional amount 59,677    9,829    —    —   
Forward Sale Contracts - Mortgage Loans
Fair value —    1    594    —   
Notional amount $ —    $ 12,750    $ 62,617    $ —   
Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and we are permitted to offset the asset position and the liability position resulting in a net presentation.
The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets as of the dates presented:
  Derivatives
(included in Other Assets) 		Derivatives
(included in Other Liabilities)
(dollars in thousands) June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019
Derivatives not Designated as Hedging Instruments:
Gross amounts recognized $ 98,649    $ 26,146    $ 98,564    $ 26,114   
Gross amounts offset (4,278)   (499)   (4,278)   (499)  
Net Amounts Presented in the Consolidated Balance Sheets 94,371    25,647    94,286    25,615   
Gross amounts not offset(1)
—    —    (91,730)   (26,127)  
Net Amount $ 94,371    $ 25,647    $ 2,556    $ (512)  
(1) Amounts represent collateral posted for the periods presented.
The following table indicates the gain or loss recognized in income on derivatives for the periods presented:
  Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2020 2019 2020 2019
Derivatives not Designated as Hedging Instruments
Interest rate swap contracts—commercial loans $ (62)   $ 26    $ 52    $ (96)  
Interest rate lock commitments—mortgage loans 186    310    2,792    398   
Forward sale contracts—mortgage loans 698    (193)   (595)   (160)  
Total Derivatives Gain/(Loss) $ 822    $ 143    $ 2,249    $ 142   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 9. BORROWINGS
Short-term borrowings are for terms under or equal to one year and are comprised of securities sold under repurchase agreements, or REPOs and FHLB advances. All REPOs are overnight short-term investments and are not insured by the Federal Deposit Insurance Corporation, or FDIC. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and, therefore, the REPOs are accounted for as secured borrowings. Mortgage-backed securities with amortized cost of $92.3 million and carrying value of $97.0 million at June 30, 2020 and amortized cost of $22.7 million and carrying value of $23.0 million at December 31, 2019, were pledged as collateral for these secured transactions. The pledged securities are held in safekeeping at the Federal Reserve. Due to the overnight short-term nature of REPOs, potential risk due to a decline in the value of the pledged collateral is low. Collateral pledging requirements with REPOs are monitored daily. FHLB advances are for various terms and are secured by a blanket lien on residential mortgages and other real estate secured loans.
Long-term borrowings are for original terms greater than one year and are comprised of FHLB advances, finance leases and junior subordinated debt securities. Long-term FHLB advances are secured by the same loans as short-term FHLB advances. We had total long-term borrowings outstanding of $2.9 million at a fixed and $45.1 million at a variable rate at June 30, 2020, excluding our finance leases.
Information pertaining to borrowings is summarized in the table below as of the dates presented:
  June 30, 2020 December 31, 2019
(dollars in thousands) Balance Weighted
Average Rate 		Balance Weighted
Average Rate
Short-term Borrowings
Securities sold under repurchase agreements $ 92,159    0.25  % $ 19,888    0.74  %
Short-term borrowings 84,541    0.38  % 281,319    1.84  %
Total Short-term Borrowings 176,700    0.31  % 301,207    1.76  %
Long-term Borrowings
Long-term borrowings 49,489    2.48  % 50,868    2.60  %
Junior subordinated debt securities 64,053    3.31  % 64,277    3.59  %
Total Long-term Borrowings 113,542    2.95  % 115,145    3.15  %
Total Borrowings $ 290,242    1.34  % $ 416,352    2.14  %
We had total borrowings at the FHLB of Pittsburgh of $132.5 million at June 30, 2020 and $532.9 million at December 31, 2019. The $132.5 million at June 30, 2020 consisted of $84.5 million in short-term borrowings and $48.0 million in long-term borrowings. Our maximum borrowing capacity with the FHLB of Pittsburgh was $3.1 billion at June 30, 2020. We utilized $383.9 million of our borrowing capacity at June 30, 2020 consisting of $132.5 million for borrowings and $251.4 million for letters of credit to collateralize public funds. Our remaining borrowing availability at June 30, 2020 is $2.7 billion.
We have completed three private placements of trust preferred securities to financial institutions. As a result, we own 100 percent of the common equity of STBA Capital Trust I, DNB Capital Trust I and DNB Capital Trust II, collectively the Trusts. The Trusts were formed to issue mandatorily redeemable capital securities to third-party investors. The proceeds from the sale of the securities and the issuance of the common equity by the Trusts were invested in junior subordinated debt securities issued by us. The Trusts are variable interest entities, and the third-party investors are the primary beneficiaries; therefore, the trusts are not consolidated into our financial statements. The Trusts pays dividends on the securities at the same rate as the interest paid by us on the junior subordinated debt held by the Trusts. DNB Capital Trust I and DNB Capital Trust II were acquired with the DNB merger.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 10. COMMITMENTS AND CONTINGENCIES
Commitments
In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.
The following table sets forth our commitments and letters of credit as of the dates presented:
(dollars in thousands) June 30, 2020 December 31, 2019
Commitments to extend credit $ 2,227,102    $ 1,910,805   
Standby letters of credit 82,906    80,040   
Total $ 2,310,008    $ 1,990,845   
Allowance for Credit Losses on Unfunded Loan Commitments
We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a draw-down on the commitment. The provision for credit losses on unfunded loan commitments is included in the provision for credit losses on our Consolidated Statements of Comprehensive (Loss) Income. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.
The activity in the allowance for credit losses on unfunded loan commitments for the three and six months ended June 30, 2020 was as follows:
(dollars in thousands) Three Months Ended
June 30, 2020
Balance at March 31, 2020 $ 6,077   
Provision for credit losses 927   
Total $ 7,004   
(dollars in thousands) Six Months Ended
June 30, 2020
Balance at December 31, 2019 $ 3,112   
Impact of adopting ASU 2016-13 1,349   
January 1, 2020 4,461   
Provision for credit losses 2,543   
Total $ 7,004   
The increase in allowance for credit losses on unfunded loan commitments for both the three and six months ended June 30, 2020 was due to higher expected credit losses due to the COVID-19 pandemic.
Litigation
In the normal course of business, we are subject to various legal and administrative proceedings and claims. While any type of litigation contains a level of uncertainty, we believe that the outcome of such proceedings or claims pending will not have a material adverse effect on our consolidated financial position or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 11. REVENUE FROM CONTRACTS WITH CUSTOMERS
We earn revenue from contracts with our customers when we have completed our performance obligations and recognize that revenue when services are provided to our customers. Our contracts with customers are primarily in the form of account agreements. Generally, our services are transferred at a point in time in response to transactions initiated and controlled by our customers under service agreements with an expected duration of one year or less. Our customers have the right to terminate their service agreements at any time.
We do not defer incremental direct costs to obtain contracts with customers that would be amortized in one year or less. These costs are primarily salaries and employee benefits recognized as expense in the period incurred.
Service charges on deposit accounts - We recognize monthly service charges for both commercial and personal banking customers based on account fee schedules. Our performance obligation is generally satisfied and the related revenue recognized at a point in time or over time when the services are provided. Other fees are earned based on specific transactions or customer activity within the customers' deposit accounts. These are earned at the time the transaction or customer activity occurs.
Debit and credit card services - Interchange fees are earned whenever debit and credit cards are processed through third-party card payment networks. ATM fees are based on transactions by our customers' and other customers' use of our ATMs or other ATMs. Debit and credit card revenue is recognized at a point in time when the transaction is settled. Our performance obligation to our customers is generally satisfied and the related revenue is recognized at a point in time when the service is provided. Third-party service contracts include annual volume and marketing incentives which are recognized over a period of twelve months when we meet thresholds as stated in the service contract.
Wealth management services - Wealth management services are primarily comprised of fees earned from the management and administration of trusts, assets under administration and other financial advisory services. Generally, wealth management fees are earned over a period of time between monthly and annually, per the related fee schedules. Our performance obligations with our customers are generally satisfied when we provide the services as stated in the customers' agreements. The fees are based on a fixed amount or a scale based on the level of services provided or amount of assets under management.
Other fee revenue - Other fee revenue includes a variety of other traditional banking services such as, electronic banking fees, letters of credit origination fees, wire transfer fees, money orders, treasury checks, checksale fees and transfer fees. Our performance obligations are generally satisfied at a point in time, while fee revenue is recognized when the services are provided or the transaction is settled.
The information presented in the following table presents the point of revenue recognition for revenue from contracts with customers. Other revenue streams such as: interest income, net securities gains and losses, insurance, mortgage banking and other revenues that are accounted for under other generally accepted accounting principles are excluded.
(dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
Revenue Streams Point of Revenue Recognition 2020 2019 2020 2019
Service charges on deposit accounts Over a period of time $ 440    $ 451    $ 924    $ 908   
At a point in time 1,902    2,761    4,976    5,457   
$ 2,342    $ 3,212    $ 5,900    $ 6,365   
Debit and credit card Over a period of time $ 184    $ 177    $ 378    $ 362   
At a point in time 3,428    3,324    6,715    6,114   
$ 3,612    $ 3,501    $ 7,093    $ 6,476   
Wealth management Over a period of time $ 652    $ 409    $ 997    $ 822   
At a point in time 1,934    1,653    3,952    3,287   
$ 2,586    $ 2,062    $ 4,949    $ 4,109   
Other fee revenue At a point in time $ 874    $ 1,145    $ 1,793    $ 2,064   
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 12. OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the change in components of other comprehensive income (loss) for the periods presented, net of tax effects.
  Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
(dollars in thousands) Pre-Tax
Amount 		Tax
(Expense)
Benefit 		Net of Tax
Amount 		Pre-Tax
Amount 		Tax Benefit (Expense) Net of Tax
Amount
Change in net unrealized gains/(losses) on debt securities available-for-sale
$ 4,201    $ (894)   $ 3,307    $ 8,968    $ (1,912)   $ 7,056   
Reclassification adjustment for net (gains)/losses on debt securities available-for-sale included in net income (1)
(142)   30    (112)   —    —    —   
Adjustment to funded status of employee benefit plans 464    (99)   365    452    (96)   356   
Other Comprehensive Income (Loss) $ 4,523    $ (963)   $ 3,560    $ 9,420    $ (2,008)   $ 7,412   
  Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
(dollars in thousands) Pre-Tax
Amount 		Tax
(Expense)
Benefit 		Net of Tax
Amount 		Pre-Tax
Amount 		Tax
(Expense)
Benefit 		Net of Tax
Amount
Change in net unrealized gains/(losses) on available-for-sale debt securities
$ 25,765    $ (5,482)   $ 20,283    $ 16,366    $ (3,490)   $ 12,876   
Reclassification adjustment for net (gains)/losses on debt securities available-for-sale included in net income (1)
(142)   30    (112)   —    —    —   
Adjustment to funded status of employee benefit plans 929    (198)   731    905    (193)   712   
Other Comprehensive Income/(Loss) $ 26,552    $ (5,650)   $ 20,902    $ 17,271    $ (3,683)   $ 13,588   
(1) Reclassification adjustments are comprised of realized security gains or losses. The realized gains or losses have been reclassified out of accumulated other comprehensive income/(loss) and have affected certain lines in the Consolidated Statements of Comprehensive (Loss) Income as follows: the pre-tax amount is included in net gain on sale of securities, the tax expense amount is included in the provision for income taxes and the net of tax amount is included in net income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued


NOTE 13. EMPLOYEE BENEFITS

Our qualified and nonqualified defined benefit plans were amended to freeze benefit accruals for all persons entitled to benefits under the plans in 2016. We will continue recording pension expense related to these plans, primarily representing interest costs on the accumulated benefit obligation and amortization of actuarial losses accumulated in the plans, as well as income from expected investment returns on pension assets. Since the plans have been frozen, no service costs are included in net periodic pension expense.
The defined benefit plan of DNB was merged into S&T's defined benefit plan at November 30, 2019 and the components of net periodic pension cost at June 30, 2020 include the impact of the addition of the DNB defined benefit plan.
The investment policy for S&T's defined benefit plan is 90 percent fixed income and 10 percent equity and cash. The expected long-term rate of return on plan assets is 3.45 percent compared to 4.80 percent in prior periods.
The following table summarizes the components of net periodic pension cost for the periods presented:
  Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2020 2019 2020 2019
Components of Net Periodic Pension Cost
Interest cost on projected benefit obligation $ 890    $ 989    $ 1,781    $ 1,978   
Expected return on plan assets (971)   (1,181)   (1,943)   (2,361)  
Net amortization 385    395    769    789   
Net Periodic Pension Expense $ 304    $ 203    $ 607    $ 406   
The components of net periodic pension expense are included in salaries and employee benefits on the Consolidated Statements of Comprehensive (Loss) Income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued



NOTE 14. QUALIFIED AFFORDABLE HOUSING

As part of our responsibilities under the Community Reinvestment Act and due to their favorable federal income tax benefits, we invest in Low Income Housing partnerships, or LIHPs. As a limited partner in these operating partnerships, we receive tax credits and tax deductions for losses incurred by the underlying properties. We use the cost method to account for these partnerships. These investments are recorded in other assets on our balance sheet. Our maximum exposure to loss associated with these investments consists of the investments' fair value plus any unfunded commitments as well as the denial of the tax credits if the project is deemed non-compliant. We do not have any loss reserves recorded related to these investments because we believe the likelihood of any loss to be remote. Our investments in LIHPs represent unconsolidated variable interest entities, or VIEs, and the assets and liabilities of the partnerships are not recorded on our balance sheet. We have determined that we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact their economic performance.
Our total investment in qualified affordable housing projects was $7.4 million at June 30, 2020 and $4.8 million at December 31, 2019. Amortization expense, included in other noninterest expense in the Consolidated Statements of Comprehensive (Loss) Income, was $0.5 million and $1.1 million for the three and six months ended June 30, 2020 and $0.7 million and $1.4 million for the three and six months ended June 30, 2019. The amortization expense was offset by tax credits of $0.6 million and $1.1 million for the three and six months ended June 30, 2020 and $0.7 million and $1.5 million for the three and six months ended June 30, 2019 as a reduction to our federal tax provision.
On September 11, 2019, we entered into a new qualified affordable housing project and committed to an investment of $10.2 million. As of June 30, 2020, we have invested $5.1 million in this new project. No amortization expense or tax credits will be recognized for this new project until complete, which we expect to be later in 2020.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued

NOTE 15. SHARE REPURCHASE PLAN

On September 16, 2019, our Board of Directors authorized a $50 million share repurchase plan. This repurchase authorization, which is effective through March 31, 2021, permits S&T to repurchase from time to time up to $50 million in aggregate value of shares of S&T's common stock through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at the discretion of S&T and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and S&T's financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. We expect to fund any repurchases from cash on hand and internally generated funds. During the three months ended June 30, 2020, we had no repurchases. During the six months ended June 30, 2020, we repurchased 411,430 common shares at a total cost of $12.6 million, or an average of $30.52 per share. Repurchase activity was suspended in March of 2020 due to the impact of the COVID-19 pandemic.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, represents an overview of our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations at and for the three and six month periods ended June 30, 2020 and 2019. Our MD&A should be read in conjunction with our Consolidated Financial Statements and Notes. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting S&T and its future business and operations. Forward-looking statements are typically identified by words or phrases such as “will likely result”, “expect”, “anticipate”, “estimate”, “forecast”, “project”, “intend”, “ believe”, “assume”, “strategy”, “trend”, “plan”, “outlook”, “outcome”, “continue”, “remain”, “potential”, “opportunity”, “believe”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”, “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses and the credit risk of our commercial and consumer loan products; changes in the level of charge-offs and changes in estimates of the adequacy of the allowance for credit losses; cyber-security concerns; rapid technological developments and changes; operational risks or risk management failures by us or critical third parties, including fraud risk; our ability to manage our reputational risks; sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; regulatory supervision and oversight, including changes in regulatory capital requirements and our ability to address those requirements; unanticipated changes in our liquidity position; changes in accounting policies, practices, or guidance, for example, our adoption of CECL; legislation affecting the financial services industry as a whole, and S&T, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions, including DNB, cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; containing costs and expenses; reliance on significant customer relationships; an interruption or cessation of an important service by a third-party provider; our ability to attract and retain talented executives and employees; general economic or business conditions, including the strength of regional economic conditions in our market area; the duration and severity of the coronavirus (“COVID-19”) pandemic, both in our principal area of operations and nationally, including the ultimate impact of the pandemic on the economy generally and on our operations; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; the stability of our core deposit base and access to contingency funding; re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.
Many of these factors, as well as other factors, are described in our Annual Report on Form 10-K for the year ended December 31, 2019, including Part I, Item 1A-"Risk Factors" and any of our subsequent filings with the SEC. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.
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Critical Accounting Policies and Estimates
Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2020 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2019 under Part II, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” except for we have updated our allowance for credit losses policy in response to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Allowance for Credit Losses
The ACL is a valuation reserve established and maintained by charges against operating income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period.
The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans.
The ACL for homogeneous loans is calculated using a life-time loss rate methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. The ACL model is comprised of six distinct 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. Each segment has a distinct set of risk characteristics monitored by management. We further evaluate the ACL at a disaggregated level which includes type of collateral and our internal risk rating system for the commercial segments and type of collateral, lien position, and FICO score, for the consumer segments. Historical credit loss experience is the basis for the estimation of expected credit losses. We apply historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on the unemployment forecast and management judgment. For periods beyond which we are able to develop reasonable and supportable forecasts, we revert to the historical loss rate. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, experience and ability of lending staff, quality of the bank’s loan review system, value of underlying collateral for collateral dependent loans, the existence of and changes in concentrations and other external factors. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities.
The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all commercial loans greater than $0.5 million that meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) any commercial troubled debt restructuring (TDR), or any loan reasonably expected to become a TDR whether on accrual or nonaccrual status and 4) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the recorded investment in the loan balance.
Although we believe our process for determining the ACL appropriately considers all the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual losses are higher than management estimates, additional provision for credit losses could be required and could adversely affect our earnings or financial position in future periods.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview
We are a bank holding company that is headquartered in Indiana, Pennsylvania with assets of $9.5 billion at June 30, 2020. We operate in five markets including Western Pennsylvania, Eastern Pennsylvania, Northeast Ohio, Central Ohio and Upstate New York.
We provide a full range of financial services with retail and commercial banking products, cash management services, trust and brokerage services. Our common stock trades on the NASDAQ Global Select Market under the symbol “STBA”.
We earn revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. We incur expenses for the cost of deposits and other funding sources, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.
Our mission is to become the financial services provider of choice within the markets that we serve which will enable us to be a high performing regional community bank. We strive to do this by delivering exceptional service and value, one customer at a time. Our strategic plan follows a disciplined approach focused on organic growth, which includes both growth within our current footprint and through market expansion. We employ a geographic market-based growth platform in order to drive organic growth. Each of our five markets is led by a Market President who is responsible for developing strategic initiatives specific to each market. We acknowledge that each of our five markets are in different stages of development and that our market based strategy will allow us to customize our approach to each market given its developmental stage and unique characteristics. We also actively evaluate acquisition opportunities that align with our strategic objectives as another source of growth. Our strategic plan includes a collaborative model that combines expertise from all areas of our business and focuses on satisfying each customer’s individual financial objectives. We continuously work to maintain and improve the efficiency of our different lines of business.
We merged with DNB Financial Corporation (DNB) on November 30, 2019. The merger expanded S&T’s footprint in Eastern Pennsylvania gaining a new presence in the counties of Chester, Delaware and Philadelphia. The merger was valued at $201.0 million, or $37.72 per share, and added approximately $899.3 million of portfolio loans and $990.6 million of deposits at December 31, 2019.

Three and Six Months Ended June 30, 2020 Update

During the three months ended June 30, 2020, we experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme. This matter was disclosed in our Form 8-K filed on May 26, 2020. The fraud was perpetrated by a single business customer and a criminal investigation is ongoing. This fraud loss reduced net income by $46.3 million, or $1.19 per diluted share, resulting in a net loss for the three months ended June 30, 2020 of $33.1 million. We continue to pursue all available sources of recovery to mitigate the loss. An internal review of the matter has been completed and various process and monitoring enhancements have been substantially implemented. The customer also had a lending relationship that was originally $15.1 million, including a $14.3 million commercial real estate, or 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 balance of $10.9 million is a nonperforming loan at June 30, 2020.
As we navigate through the uncertainty resulting from the COVID-19 pandemic, our first priority is the safety of both our employees and customers. Our financial performance has been negatively impacted in many ways due to the COVID-19 pandemic. We are closely monitoring our asset quality with a focus on the portfolios that have been significantly impacted by the COVID-19 pandemic. We have increased our allowance for credit losses, or ACL, to be responsive to this additional risk within our loan portfolio. Our balance sheet is asset sensitive so we have experienced a negative impact to our net interest income and net interest margin, or NIM, in this low interest rate environment. Our noninterest income has also been negatively impacted due to changes in our customers' behavior during these times which has been somewhat mitigated by strong mortgage banking income due to significant refinance activity. We are taking a prudent approach to capital management given the economic uncertainty. Our internally-run capital stress test results demonstrate that we have adequate capital cushions. We are well capitalized and have sufficient excess capital to manage the uncertainty resulting from the COVID-19 pandemic.
In response to the current economic environment as a result of the COVID-19 pandemic, we completed an interim quantitative goodwill impairment analysis as of June 30, 2020. Based upon our impairment analysis, we determined that our goodwill of $373.3 million was not impaired at June 30, 2020. We expect to evaluate goodwill for impairment quarterly given the current environment.




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COVID-19 Update

S&T is monitoring the impact of the COVID-19 pandemic and has taken steps to mitigate the potential risks and impact on S&T and to promote the health and safety of our employees, and the customers and communities that we serve. We have taken preventive health measures for our employees through rigorous sanitation, social distancing, wearing masks, remote work where feasible and providing access to financial wellness programs. We reopened our branches with extensive safety measures and are encouraging our customers to use online and mobile banking solutions. We have also extended our solution center hours to allow for customer consultation without entering a branch. Our Business Continuity teams were activated and have guided our efforts to respond to the rapidly developing situation.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program, or PPP, a $349 billion program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. The Paycheck Protection Program and Health Care Enhancement Act, or PPP/HCEA Act, was signed into law on April 24, 2020. The PPP/HCEA Act authorized an additional $310 billion of funding under the CARES Act for PPP loans among other provisions. On July 4, 2020, legislation was passed to extend the application period for the PPP program through August 8, 2020. These loans are intended to cover eight weeks of payroll and other permitted expenses to help those businesses remain viable.
As of June 30, 2020, we originated $547.6 million of PPP loans. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted expenses in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00 percent and a term of two years, or five years for loans approved by the Small Business Administration, or SBA, on or after June 5, 2020. Payments are deferred for at least six months of the loan. The loans are 100 percent guaranteed by the SBA.
The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable. The COVID-19 pandemic has had, and we expect that it will continue to have, negative impacts on S&T’s commercial and consumer loan customers and the economy as a whole. The pandemic caused, among other things, an increase in the provision for credit losses, a higher ACL as a percentage of total portfolio loans as of June 30, 2020 compared to March 31, 2020, and exclusive of the increase in portfolio loans due to the PPP portfolio, a decrease in portfolio loans compared to both March 31, 2020 and December 31, 2019. The severity and length of the COVID-19 pandemic’s impact on S&T and the U.S. and global economies continue to be unknown.
In order to assist our customers through this difficult period, we have provided the following assistance, which may have an adverse impact on our results in the short term, but which we believe will provide better outcomes in the long term for our customers and for S&T:

•We have provided needs-based payment deferrals and modifications to interest only periods to 1,289 commercial loans totaling $1.3 billion at June 30, 2020.
•We have provided loan payment deferrals, with no negative credit bureau reporting, to 1,071 mortgage and consumer loans totaling $123.0 million at June 30, 2020.
•We have paused foreclosures/repossessions for mortgages and consumer loans.
Earnings Summary
We recognized net losses of ($33.1) million, or ($0.85) per share and ($19.8) million, or ($0.51) per share for the three and six months ended June 30, 2020. These losses are primarily the result of the $58.7 million pre-tax fraud loss recognized in the second quarter of 2020 which reduced net income by $46.3 million, or $1.19 per diluted share. The net losses for the three and six months ended June 30, 2020 represent $59.2 million and $68.9 million decreases in net income compared to the same periods in 2019.
The decrease in net income for the three months ended June 30, 2020 of $59.2 million compared to the same period in 2019 was comprised of an increase of $84.6 million in the provision for credit losses and an increase in other noninterest expenses of $3.1 million offset by increases of $9.3 million in net interest income and $2.3 million noninterest income and a decrease of $16.9 million in the provision for income taxes. The decrease in net income for the six months ended June 30, 2020 of $68.9 million compared to the same period in 2019 was comprised of an increase of $99.0 million in the provision for credit losses, an increase in other noninterest expense of $10.6 million offset by increases of $19.0 million in net interest income and $3.4 million in noninterest income and a decrease of $18.3 million in the provision for income taxes.
Net interest income increased $9.3 million and $19.0 million to $70.1 million and $140.2 million for the three and six months ended June 30, 2020 compared to $60.8 million and $121.2 million for the same periods in 2019. The increases were primarily due to higher average interest-earning assets offset by lower short-term interest rates compared to the same periods in
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2019. Average interest-earning assets increased $1.9 billion and $1.6 billion for the three and six months ended June 30, 2020 compared to the same periods in 2019. Average loan balances increased $1.7 billion and $1.5 billion compared to the same periods in 2019 due to the DNB merger, PPP loans and organic loan growth. Average interest-bearing liabilities increased $1.2 billion and $1.1 billion for the three and six months ended June 30, 2020 compared to the same periods in 2019 due to the DNB merger and organic deposit growth. Net interest margin, on a fully taxable-equivalent, or FTE, basis (non-GAAP), decreased 37 and 28 basis points to 3.31 percent and 3.42 percent for the three and six months ended June 30, 2010 compared to 3.68 percent and 3.70 percent for the same periods in 2019 due to the decline in short-term interest rates during 2020. Net interest margin is reconciled to net interest income adjusted to an FTE basis below in the "Net Interest Income" section of this MD&A.
The provision for credit losses, which includes a provision for losses on unfunded commitments, increased $84.6 million and $99.0 million to $86.8 million and $106.8 million for the three and six months ended June 30, 2020 compared to $2.2 million and $7.9 million in the same periods of 2019.The significant increase in the provision for credit losses during the three and six months ended June 30, 2020 was mainly due to the customer fraud that resulted in a $58.7 million charge-off as well as the impact of the COVID-19 pandemic. For the three and six months ended June 30, 2020, we had net charge-offs of $68.1 million and $79.2 million compared to net charge-offs of $2.1 million and $7.4 million for the same periods in 2019. Annualized net loan charge-offs to average loans were 3.58 percent and 2.15 percent for the three and six months ended June 30, 2020 compared to 0.14 percent and 0.25 percent for the same periods in 2019.
Total noninterest income increased $2.3 million and $3.3 million to $15.2 million and $27.6 million for the three and six months ended June 30, 2020 compared to $12.9 million and $24.3 million for the same periods in 2019. Total noninterest income includes the impact of the DNB merger in the three and six months ended June 30, 2020 since the merger closed on November 30, 2019. The increase in noninterest income primarily related to an increase of $2.0 million and $2.7 million in mortgage banking fees for the three and six months ended June 30, 2020 due to an increase in the volume of loans originated for sale in the secondary market due to a decline in mortgage rates compared to the same periods in 2019. Also impacting the increase for six months ended June 30, 2020 was higher commercial loan swap income of $1.7 million as we have seen a high demand for this product. Offsetting these increases was a $2.2 million decrease in other income primarily attributable to the decline in stock market performance resulting in a change in the valuation related to a deferred compensation plan of $1.0 million, which has a corresponding offset in salaries and employee benefits expense resulting in no impact to net income and a decrease in the change in the value of the equity securities portfolio of $1.0 million compared to the same periods in 2019.
Noninterest expense increased $3.1 million and $10.6 million to $43.5 million and $89.9 million in three and six months ended June 30, 2020 compared to $40.4 million and $79.3 million in the same periods in 2019. Total noninterest expense includes the impact of the DNB merger in the three and six months ended June 30, 2020 since the merger closed on November 30, 2019. The increase in noninterest expense for the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to higher operating expenses after the merger with DNB. The increase in noninterest expense for the six months ended June 30, 2020 was due to higher operating expenses due to the merger, increases of $1.7 million in merger related expenses and $2.8 million in other noninterest expenses including $1.2 million related to historic tax credits.
The provision for income taxes decreased $16.9 million to an $11.8 million tax benefit for the three months ended June 30, 2020 and decreased $18.3 million to a $9.0 million tax benefit for the six months ended June 30, 2020 compared to the same periods in 2019. The decrease in pretax income of $76.0 million for the three months and $87.2 million for six months ended June 30, 2020 is primarily due to the $58.7 million loss resulting from the customer fraud recognized during the quarter ended June 30, 2020. Our effective tax rate changed to 26.3 percent and 31.3 percent for the three and six months ended June 30, 2020 compared to 16.3 percent and 15.9 percent for the same periods in 2019. The change in our effective tax rate was primarily due to the pretax loss for three and six months ended June 30, 2020.
Explanation of Use of Non-GAAP Financial Measures
In addition to the results of operations presented in accordance with generally accepted accounting principles, or GAAP, in the United States, management uses, and this quarterly report references, net interest income and net interest margin on a fully taxable equivalent, or FTE, basis, which are non-GAAP financial measures. Management believes net interest income and net interest margin on an FTE basis provide information useful to investors in understanding our underlying business, operational performance and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although management believes that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered alternatives to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies.
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We believe the presentation of net interest income and net interest margin on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Interest income (GAAP) per the Consolidated Statements of Comprehensive (Loss) Income is reconciled to net interest income adjusted on an FTE basis and net interest margin adjusted on an FTE basis in the "Results of Operations - Three and Six Months Ended June 30, 2020 Compared to Three and Six Months Ended June 30, 2019 - Net Interest Income" section of this MD&A.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2020 Compared to
Three and Six Months Ended June 30, 2019
Net Interest Income
Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our ALCO, in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what we believe is an acceptable level of net interest income.
The interest income on interest-earning assets and the net interest margin are presented on an FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory tax rate of 21 percent for each period and the dividend-received deduction for equity securities. We believe this to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable sources of interest income.
The following table reconciles interest income per the Consolidated Statements of Comprehensive (Loss) Income to net interest income and rates on an FTE basis for the periods presented:
  Three Months Ended June 30, Six Months Ended June 30, 2020
(dollars in thousands) 2020 2019 2020 2019
Total interest income $ 80,479    $ 79,624    $ 168,069    $ 158,214   
Total interest expense 10,331    18,797    27,885    37,031   
Net Interest Income per Consolidated Statements of Comprehensive (Loss) Income 70,148    60,827    140,184    121,183   
Adjustment to FTE basis 847    958    1,697    1,919   
Net Interest Income on an FTE Basis (Non-GAAP) $ 70,995    $ 61,785    $ 141,881    $ 123,102   
Net interest margin 3.27  % 3.63  % 3.37  % 3.64  %
Adjustment to FTE basis 0.04  % 0.05  % 0.05  % 0.06  %
Net Interest Margin on an FTE Basis (Non-GAAP) 3.31  % 3.68  % 3.42  % 3.70  %
Income amounts are annualized for rate calculations.

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Average Balance Sheet and Net Interest Income Analysis (FTE)
The following tables provide information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:
 
  Three Months Ended June 30, 2020 Three Months Ended June 30, 2019
(dollars in thousands) Average Balance Interest Rate Average Balance Interest Rate
ASSETS
Interest-bearing deposits with banks $ 163,019    $ 33    0.08  % $ 49,949    $ 274    2.19  %
Securities, at fair value(2)(3)
785,229    5,024    2.56  % 673,117    4,482    2.66  %
Loans held for sale 9,931    77    3.08  % 1,452    16    4.44  %
Commercial real estate 3,389,616    35,617    4.23  % 2,895,146    36,158    5.01  %
Commercial and industrial 2,200,148    19,733    3.61  % 1,559,222    20,087    5.17  %
Commercial construction 430,912    4,020    3.75  % 242,192    3,242    5.37  %
Total Commercial Loans 6,020,676    59,370    3.97  % 4,696,560    59,487    5.08  %
Residential mortgage 976,916    10,241    4.20  % 734,372    8,253    4.50  %
Home equity 543,770    4,993    3.69  % 463,480    6,267    5.42  %
Installment and other consumer 79,944    1,259    6.34  % 71,319    1,286    7.23  %
Consumer construction 12,758    145    4.58  % 11,014    149    5.41  %
Total Consumer Loans 1,613,388    16,638    4.14  % 1,280,185    15,955    4.99  %
Total Portfolio Loans 7,634,064    76,008    4.00  % 5,976,745    75,442    5.06  %
Total Loans(1)(2)
7,643,995    76,085    4.00  % 5,978,197    75,458    5.06  %
Federal Home Loan Bank and other restricted stock 19,709    184    3.75  % 21,141    368    6.97  %
Total Interest-earning Assets 8,611,952    81,326    3.80  % 6,722,404    80,582    4.81  %
Noninterest-earning assets 817,767    523,636   
Total Assets $ 9,429,719    $ 7,246,040   
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand $ 1,033,905    $ 610    0.24  % $ 550,200    $ 631    0.46  %
Money market 2,076,483    2,578    0.50  % 1,695,349    8,169    1.93  %
Savings 887,357    162    0.07  % 760,743    484    0.26  %
Certificates of deposit 1,560,885    5,877    1.51  % 1,389,968    6,771    1.95  %
Total Interest-bearing Deposits 5,558,630    9,227    0.67  % 4,396,260    16,055    1.46  %
Securities sold under repurchase agreements 85,302    53    0.25  % 16,337    28    0.69  %
Short-term borrowings 178,273    167    0.38  % 242,759    1,642    2.71  %
Long-term borrowings 49,774    314    2.53  % 70,049    500    2.86  %
Junior subordinated debt securities 64,044    570    3.58  % 45,619    572    5.03  %
Total Borrowings 377,393    1,104    1.18  % 374,764    2,742    2.94  %
Total Interest-bearing Liabilities 5,936,023    10,331    0.70  % 4,771,024    18,797    1.58  %
Noninterest-bearing liabilities 2,302,676    1,523,676   
Shareholders’ equity 1,191,020    951,340   
Total Liabilities and Shareholders’ Equity $ 9,429,719    $ 7,246,040   
Net Interest Income (2)(3)
$ 70,995    $ 61,785   
Net Interest Margin (2)(3)
3.31  % 3.68  %
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2020 and 2019.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
(dollars in thousands) Average Balance Interest Rate Average Balance Interest Rate
ASSETS
Interest-bearing deposits with banks $ 131,332    $ 388    0.59  % $ 51,758    $ 626    2.42  %
Securities, at fair value(2)(3)
786,043    10,020    2.55  % 676,797    9,039    2.67  %
Loans held for sale 5,899    94    3.19  % 1,175    25    4.29  %
Commercial real estate 3,399,150    75,710    4.48  % 2,900,181    72,122    5.01  %
Commercial and industrial 1,975,913    39,471    4.02  % 1,534,080    39,420    5.18  %
Commercial construction 408,638    8,515    4.19  % 246,073    6,554    5.37  %
Total Commercial Loans 5,783,701    123,696    4.30  % 4,680,334    118,096    5.09  %
Residential mortgage 983,891    20,569    4.19  % 728,495    16,123    4.44  %
Home equity 541,981    11,493    4.26  % 465,598    12,536    5.43  %
Installment and other consumer 79,812    2,648    6.67  % 70,215    2,508    7.20  %
Consumer construction 11,633    266    4.59  % 10,244    293    5.77  %
Total Consumer Loans 1,617,317    34,976    4.34  % 1,274,552    31,460    4.96  %
Total Portfolio Loans 7,401,018    158,672    4.31  % 5,954,886    149,556    5.06  %
Total Loans(1)(2)
7,406,917    158,766    4.31  % 5,956,061    149,581    5.06  %
Federal Home Loan Bank and other restricted stock 21,655    592    5.47  % 22,797    887    7.79  %
Total Interest-earning Assets 8,345,947    169,766    4.09  % 6,707,413    160,133    4.81  %
Noninterest-earning assets 752,576    521,082   
Total Assets $ 9,098,523    $ 7,228,495   
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand $ 987,968    $ 1,991    0.41  % $ 547,960    $ 1,183    0.44  %
Money market 2,035,124    8,896    0.88  % 1,632,234    15,461    1.91  %
Savings 859,171    639    0.15  % 765,638    957    0.25  %
Certificates of deposit 1,581,104    13,039    1.66  % 1,412,117    13,435    1.92  %
Total Interest-bearing Deposits 5,463,367    24,565    0.90  % 4,357,949    31,036    1.44  %
Securities sold under repurchase agreements 58,046    96    0.33  % 19,735    57    0.59  %
Short-term borrowings 232,319    1,312    1.14  % 280,862    3,787    2.72  %
Long-term borrowings 50,809    639    2.53  % 70,122    993    2.85  %
Junior subordinated debt securities 64,120    1,273    3.99  % 45,619    1,158    5.12  %
Total Borrowings 405,294    3,320    1.65  % 416,338    5,995    2.90  %
Total Interest-bearing Liabilities 5,868,661    27,885    0.96  % 4,774,287    37,031    1.56  %
Noninterest-bearing liabilities 2,039,565    1,505,964   
Shareholders’ equity 1,190,297    948,244   
Total Liabilities and Shareholders’ Equity $ 9,098,523    $ 7,228,495   
Net Interest Income (2)(3)
$ 141,881    $ 123,102   
Net Interest Margin (2)(3)
3.42  % 3.70  %
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2020 and 2019.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
Net interest income on an FTE basis (non-GAAP) increased $9.2 million and $18.8 million for the three and six months ended June 30, 2020 compared to the same periods in 2019. Net interest income was favorably impacted by purchase accounting fair value adjustments of $1.6 million and $2.7 million for the three and six months ended June 30, 2020. The net interest margin on an FTE basis (non-GAAP) decreased 37 and 28 basis points for the three and six months ended June 30, 2020 compared to the same periods in 2019. This is mostly due to decreases in short-term interest rates of approximately 225 basis points between June 30, 2019 and June 30, 2020. Purchase accounting fair value adjustments favorably impacted the net interest margin rate on an FTE basis by 7 and 6 basis points for the three and six months ended June 30, 2020. PPP loans negatively impacted the net interest margin on an FTE basis by 5 and 3 basis points for the three and six months ended June 30, 2020.
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Interest income on an FTE basis (non-GAAP) increased $0.7 million, or 0.9 percent, for the three months ended June 30, 2020 and increased $9.6 million, or 6.0 percent, for the six months ended June 30, 2020, compared to the same periods in 2019. The increases were primarily due to increases in average interest-earning assets of $1.9 billion and $1.6 billion for the three and six months ended June 30, 2020 offset by lower short-term interest rates compared to the same periods in 2019. Average loan balances increased $1.7 billion and $1.5 billion compared to the same periods in 2019 due to the DNB merger and organic loan growth which included $449.3 million of the loan growth from PPP loans. The average rate earned on loans decreased 106 for the three months and 75 basis points for the sixth months compared to the same periods in 2019 primarily due to lower short-term interest rates. Average interest-bearing deposits with banks increased $113.1 million and $79.6 million and the average rate earned decreased 211 and 183 basis points compared to the same periods in 2019. Average investment securities increased $112.1 million and $109.2 million and the average rate earned decreased 10 and 12 basis points compared to the same periods in 2019. Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 101 and 72 basis points for the three and six months ended June 30, 2020 compared to the same periods in 2019.
Interest expense decreased $8.5 million and $9.1 million for the three and six months ended June 30, 2020 compared to the same periods in 2019. The decreases were primarily due to lower short-term interest rates compared to the same periods in 2019. Average interest-bearing deposits increased $1.2 billion and $1.1 billion for the three and six months ended June 30, 2020 compared to the same periods in 2019 due to the DNB merger and organic deposit growth. We experienced deposit growth in the three months ended June 30, 2020 due to customer PPP and stimulus payments along with customers conservatively holding cash deposits in these uncertain times. The average rate paid decreased 79 and 54 basis points compared to the same periods in 2019 primarily due to lower short-term interest rates. Average total borrowings increased $2.6 million and decreased $11.0 million and the average rate paid decreased 176 and 125 basis points compared to the same periods in 2019. Overall, the cost of interest-bearing liabilities decreased 88 and 60 basis points for the three and six months ended June 30, 2020, compared to the same periods in 2019.
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The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:
Three Months Ended June 30, 2020 Compared to June 30, 2019
Six Months Ended June 30, 2020 Compared to June 30, 2019
(dollars in thousands)
Volume (4)
Rate (4)
Total
Volume (4)
Rate (4)
Total
Interest earned on:
Interest-bearing deposits with banks $ 620    $ (860)   $ (240)   $ 962    $ (1,199)   $ (237)  
Securities, at fair value(2)(3)
747    (205)   542    1,459    (479)   980   
Loans held for sale 94    (34)   60    101    (33)   68   
Commercial real estate 6,176    (6,717)   (541)   12,408    (8,821)   3,587   
Commercial and industrial 8,257    (8,611)   (354)   11,354    (11,303)   51   
Commercial construction 2,527    (1,749)   778    4,330    (2,369)   1,961   
Total Commercial Loans 16,960    (17,077)   (117)   28,092    (22,493)   5,599   
Residential mortgage 2,726    (739)   1,987    5,652    (1,206)   4,446   
Home equity 1,086    (2,360)   (1,274)   2,057    (3,099)   (1,042)  
Installment and other consumer 155    (182)   (27)   343    (203)   140   
Consumer construction 24    (27)   (3)   40    (67)   (27)  
Total Consumer Loans 3,991    (3,308)   683    8,092    (4,575)   3,517   
Total Portfolio Loans 20,951    (20,385)   566    36,184    (27,068)   9,116   
Total Loans (1)(2)
21,045    (20,419)   626    36,285    (27,101)   9,184   
Federal Home Loan Bank and other restricted stock (25)   (158)   (183)   (44)   (251)   (295)  
Change in Interest Earned on Interest-earning Assets 22,387    (21,642)   745    38,662    (29,030)   9,632   
Interest paid on:
Interest-bearing demand $554    ($575)   ($21)   $950    ($142)   $808   
Money market 1,836    (7,428)   (5,592)   3,816    (10,381)   (6,565)  
Savings 81    (403)   (322)   117    (435)   (318)  
Certificates of deposit 833    (1,726)   (893)   1,608    (2,004)   (396)  
Total Interest-bearing Deposits 3,304    (10,132)   (6,828)   6,491    (12,962)   (6,471)  
Securities sold under repurchase agreements 118    (93)   25    112    (73)   39   
Short-term borrowings (436)   (1,039)   (1,475)   (655)   (1,821)   (2,476)  
Long-term borrowings (145)   (41)   (186)   (273)   (80)   (353)  
Junior subordinated debt securities 231    (234)   (3)   470    (355)   115   
Total Borrowings (232)   (1,407)   (1,639)   (346)   (2,329)   (2,675)  
Change in Interest Paid on Interest-bearing Liabilities 3,072    (11,539)   (8,467)   6,145    (15,291)   (9,146)  
Change in Net Interest Income $ 19,315    $ (10,103)   $ 9,212    $ 32,517    $ (13,739)   $ 18,778   
(1) Nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent for 2020 and 2019.
(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.
(4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Credit Losses

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The provision for credit losses increased $84.6 million and $99.0 million to $86.8 million and $106.8 million for the three and six months ended June 30, 2020 compared to $2.2 million and $7.9 million for the same periods in 2019. The provision for credit losses included $0.9 million and $2.5 million for the reserve for unfunded commitments for the three and six months ended June 30, 2020.
During the three months ended June 30, 2020, we recognized a charge-off of $58.7 million related to a customer fraud resulting from a check kiting scheme. The fraud was perpetrated by a single business customer and a criminal investigation is ongoing. We continue to pursue all available sources of recovery to mitigate the loss. The customer also had a lending relationship of $15.1 million, including a $14.3 million CRE loan and a $0.8 million line of credit. $10.9 million of the loans were moved to nonperforming after recognizing a $4.2 million charge-off during the three months ended June 30, 2020.
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The significant increase in the provision for credit losses during the three and six months ended June 30, 2020 was mainly due to the customer fraud that resulted in a $58.7 million charge-off as well as the impact of the COVID-19 pandemic. 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 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.
For the three and six months ended June 30, 2020, we had net charges-offs of $68.1 million and $79.2 million compared to $2.1 million and $7.7 million for the same periods in 2019. In addition to the $58.7 million charge-off from the customer fraud and the $4.2 million loan charge-off for the lending relationship with this customer during the three months ended June 30, 2020, the most significant charge-off for the sixth months ended June 30, 2020 was a $9.9 million C&I relationship that was charged off. We obtained information on the relationship subsequent to filing our Annual Report on Form 10-K for the year ended December 31, 2019, but before the end of the first quarter of 2020; therefore, we recorded a $9.9 million specific reserve in the day one CECL adjustment. The updated information supported a loss existed at January 1, 2020.
Nonperforming loans increased $45.1 million to $90.1 million at June 30, 2020 compared to $45.0 million at June 30, 2019. The significant increases in nonperforming loans primarily related to the addition of a $20.5 million CRE relationship, the $10.9 million related to the customer fraud and a $4.3 million C&I relationship. The $20.5 million CRE relationship became a performing TDR in the third quarter of 2019 and then moved to nonperforming in the first quarter of 2020 when the borrower experienced financial deterioration that led to cash flow issues. The relationship was individually assessed at June 30, 2020, and based upon updated appraisals, a $0.6 million ACL was added due to the relationship being under-collateralized as of June 30, 2020.
Noninterest Income
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
Net gain on sale of securities $ 142    $ —    $ 142    —    $ 142    $ —    $ 142    —   
Debit and credit card 3,612    3,501    111    3.2  % 7,093    6,476    617    9.5  %
Mortgage banking 2,623    637    1,986    311.7  % 3,859    1,131    2,728    241.2  %
Wealth management 2,586    2,062    524    25.4  % 4,949    4,109    840    20.4  %
Service charges on deposit accounts 2,342    3,212    (870)   (27.1) % 5,900    6,365    (465)   (7.3) %
Commercial loan swap income 945    1,102    (157)   (14.2) % 3,429    1,683    1,746    103.7  %
Other 2,974    2,387    587    24.6  % 2,255    4,499    (2,244)   (49.9) %
Total Noninterest Income $ 15,224    $ 12,901    $ 2,323    18.0  % $ 27,627    $ 24,263    $ 3,364    13.9  %

Noninterest income increased $2.3 million to $15.2 million for the three months ended June 30, 2020 and increased $3.4 million to $27.6 million for the six months ended June 30, 2020 compared to the same periods in 2019. Total noninterest income includes the impact of the DNB merger in the three and six months ended June 30, 2020 which closed on November 30, 2019. Mortgage banking income increased $2.0 million and $2.7 million for the three and six months ended June 30, 2020 due to an increase in the volume of loans originated for sale in the secondary market resulting from a decline in mortgage interest rates from the comparable period. Wealth management income increased $0.5 million and $0.8 million for the three and six months ended June 30, 2020 due to the merger. Other income increased $0.6 million for the three months and decreased $2.2 million for the sixth months ended related to changes in the valuation of our deferred compensation plan, which has a corresponding offset in salaries and employee benefits expense resulting in no impact to net income and the change in value in the equity securities portfolio compared to the prior periods. Commercial loan swap income decreased $0.2 million for the three months and increased $1.7 million for the six months ended June 30, 2020 due to higher customer demand for this product in the current interest rate environment. Service charges on deposit accounts decreased $0.9 million and $0.5 million for the three and six months ended June 30, 2020 due to lower transaction volumes related to the COVID-19 pandemic.
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Noninterest Expense
  Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
Salaries and employee benefits(1)
$ 21,419    $ 20,290    $ 1,129    5.6  % $ 42,754    $ 41,199    $ 1,555    3.8  %
Data processing and information technology(1)
3,585    3,414    171    5.0  % 7,453    6,646    807    12.1  %
Net occupancy(1)
3,437    2,949    488    16.6  % 7,202    5,986    1,216    20.3  %
Furniture, equipment and software(1)
3,006    2,301    705    30.6  % 5,525    4,531    994    21.9  %
Professional services and legal(1)
1,932    1,145    787    68.7  % 2,980    2,329    651    27.9  %
Other taxes 1,604    1,456    148    10.2  % 3,205    2,641    564    21.3  %
FDIC insurance 1,048    695    353    50.8  % 1,818    1,211    607    50.1  %
Marketing(1)
979    1,310    (331)   (25.3) % 2,090    2,452    (362)   (14.8) %
Merger related expenses —    618    (618)   NM 2,342    618    1,724    279.0  %
Other(1)
6,468    6,174    294    4.8  % 14,501    11,658    2,843    24.4  %
Total Noninterest Expense $ 43,478    $ 40,352    $ 3,126    7.7  % $ 89,869    $ 79,271    $ 10,598    13.4  %
(1)Excludes Merger related expenses for 2020 amounts only.
NM - not meaningful

Noninterest expense increased $3.1 million to $43.5 million for the three months ended June 30, 2020 and $10.6 million to $89.9 million for the six months ended June 30, 2020 compared to the same periods in 2019. Total noninterest expense includes the impact of the DNB merger in the three and six months ended June 30, 2020 which closed on November 30, 2019. Increases in net occupancy expense, furniture, equipment and software, FDIC insurance and other taxes for both the three and six month periods related to the DNB merger. Total merger related expenses of $2.3 million for the six months ended June 30, 2020 included $1.4 million of salaries and employee benefits, $0.4 million for data processing, $0.2 million for professional services and $0.3 million in various other expenses. Other noninterest expense increased during the six-month period due to the merger and to historic tax credits for $1.2 million. Salaries and employee benefits increased $1.1 million for the three months and $1.6 million for the six months primarily due to additional employees. Professional services and legal expenses increased $0.8 million for the three months and $0.7 million for the six months mainly due to higher legal expense. Data processing and information technology increased $0.2 million for the three months and $0.8 million for the six months due to the annual increase with our third-party data processor and the merger.
Provision for Income Taxes

The provision for income taxes decreased $16.9 million to an $11.8 million tax benefit for the three months ended June 30, 2020 and decreased $18.3 million to a $9.0 million tax benefit for the six months ended June 30, 2020 compared to the same periods in 2019. The decrease in pretax income of $76.0 million for the three months and $87.2 million for six months ended June 30, 2020 was primarily due to the $58.7 million loss resulting from the customer fraud recognized during the three months ended June 30, 2020.
For the quarter ended June 30, 2020, we utilized the actual effective tax rate to calculate the June 30, 2020 tax provision. The actual effective tax rate is applied when the application of the estimated annual effective tax rate, or EAETR, is impractical because it is not possible to forecast a reliable EAETR for the reporting period. The actual effective tax rate approach treats the year-to-date period as if it is the annual period and determines the income tax expense or benefit on that basis. The use of the actual effective tax rate is more appropriate than the EAETR, at this time, because small changes in estimated ordinary pretax income result in significant changes in the EAETR. Our effective tax rate changed to 26.3 percent and 31.3 percent for the three and six months ended June 30, 2020 compared to 16.3 percent and 15.9 percent for the same periods in 2019.
Financial Condition as of June 30, 2020
Total assets increased $709.6 million to $9.5 billion at June 30, 2020 compared $8.8 billion at December 31, 2019. Total portfolio loans increased $411.4 million to $7.5 billion at June 30, 2020 compared to $7.1 billion at December 31, 2019. The increase in portfolio loans primarily related to growth in the commercial loan portfolio of $432.3 million with increases of $419.5 million in C&I, which included $547.6 million of loans from the PPP, and $83.8 million in commercial construction offset by a decrease of $71.0 million in the CRE portfolio compared to December 31, 2019. Excluding the PPP loans, portfolio loans decreased $136.2 million compared to December 31, 2019 due to decreased activity related to the COVID-19 pandemic. Consumer loans decreased $20.9 million compared to December 31, 2019 primarily in the residential mortgage portfolio of
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$27.6 million offset by increases of $4.7 million in consumer construction loans, $1.2 million in home equity loans and $0.8 million in installment and other consumer loans.
Securities increased $20.1 million to $804.4 million at June 30, 2020 from $784.3 million at December 31, 2019. The increase in securities is primarily due to increases in the unrealized gains of $25.6 million at June 30, 2020 partially offset by pay downs on mortgage-backed securities. The bond portfolio had an unrealized gain of $36.3 million at June 30, 2020 compared to $10.7 million at December 31, 2019 due to a decrease in interest rates.
Our deposits increased $831.3 million, with total deposits of $7.9 billion at June 30, 2020 compared to $7.0 billion at December 31, 2019. Customer deposits increased $855.2 million from December 31, 2019. The increase in customer deposits primarily related to PPP and stimulus programs along with customers conservatively holding cash deposits during these uncertain times. Customer noninterest-bearing demand deposits increased $552.9 million, money market deposits increased $171.8 million, interest-bearing demand increased $93.1 million and savings increased $85.3 million offset by a decrease in certificates of deposit of $47.9 million. Total brokered deposits decreased $23.9 million from December 31, 2019 due to the customer deposit growth. Brokered deposits are an additional source of funds utilized by ALCO as a way to diversify funding sources, as well as manage our funding costs and structure.
Total borrowings decreased $126.1 million, with total borrowings of $290.2 million at June 30, 2020 compared to $416.3 million at December 31, 2019 due to an increase in deposits. The decrease in borrowings primarily relates to the decline in short-term borrowings of $196.8 million offset by an increase in securities sold under repurchase agreements of $72.3 million to $92.2 million at June 30, 2020 compared to $19.9 million at December 31, 2019 due to demand for the product by our REPO customers.
Total shareholders’ equity decreased by $56.2 million to $1.1 billion at June 30, 2020 compared to $1.2 billion at December 31, 2019. The decrease was primarily due to the previously disclosed fraud loss, net of tax, of $46.4 million that resulted in a net loss of $19.8 million, the cumulative-effect adjustment related to the adoption of ASU 2016-13, Credit Losses, of $22.6 million, share repurchases of $12.6 million, dividends of $22.0 million, offset by a $20.9 million increase in other comprehensive income. The increase in other comprehensive income was due to a $20.2 million increase in unrealized gains on our available-for-sale investment securities, net of tax, and a $0.7 million change in the funded status of our employee benefit plans offset by a $0.1 million reclassification adjustment for net gains on debt securities available-for-sale.
Securities Activity
(dollars in thousands) June 30, 2020 December 31, 2019 $ Change
U.S. treasury securities $ 10,355    $ 10,040    $ 315   
Obligations of U.S. government corporations and agencies 163,703    157,697    6,006   
Collateralized mortgage obligations of U.S. government corporations and agencies 181,162    189,348    (8,186)  
Residential mortgage-backed securities of U.S. government corporations and agencies 19,768    22,418    (2,650)  
Commercial mortgage-backed securities of U.S. government corporations and agencies 284,550    275,870    8,680   
Corporate obligations 5,038    7,627    (2,589)  
Obligations of states and political subdivisions 137,127    116,133    20,994   
Available-for-Sale Debt Securities 801,703    779,133    22,570   
Marketable equity securities 2,663    5,150    (2,487)  
Total Securities $ 804,366    $ 784,283    $ 20,083   
We invest in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income, and as a tool of ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to an investment policy approved annually by our Board of Directors and administered through ALCO and our treasury function. Securities increased $20.1 million to $804.4 million at June 30, 2020 from $784.3 million at December 31, 2019. The increase in securities is primarily due to an increase in market value compared to December 31, 2019.
At June 30, 2020 our bond portfolio was in a net unrealized gain position of $36.3 million compared to a net unrealized gain position of $10.7 million at December 31, 2019. At June 30, 2020 total gross unrealized gains in the bond portfolio were $36.3 million compared to December 31, 2019, when total gross unrealized gains were $11.7 million offset by gross unrealized losses of $1.0 million. Management evaluates the securities portfolio to determine if an ACL is needed each quarter. We did not record an ACL related to the securities portfolio at June 30, 2020.
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Loan Composition
  June 30, 2020 December 31, 2019
(dollars in thousands) Amount % of Loans Amount % of Loans
Commercial
Commercial real estate $ 3,345,513    44.3  % $ 3,416,518    47.9  %
Commercial and industrial 2,140,355    28.4    1,720,833    24.1   
Construction 459,264    6.1    375,445    5.2   
Total Commercial Loans 5,945,132    78.8  % 5,512,796    77.2  %
Consumer
Residential mortgage 971,023    12.9  % 998,585    14.0  %
Home equity 539,519    7.1    538,348    7.6   
Installment and other consumer 79,816    1.0    79,033    1.1   
Construction 13,068    0.2    8,390    0.1   
Total Consumer Loans 1,603,426    21.2  % 1,624,356    22.8  %
Total Portfolio Loans 7,548,558    100.0  % 7,137,152    100.0  %
Loans held for sale 14,259    5,256   
Total Loans $ 7,562,817    $ 7,142,408   
The loan portfolio represents the most significant source of interest income for us. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower’s industry or the overall economic climate can significantly impact the borrower’s ability to pay.
Commercial loans, including CRE, C&I and commercial construction, comprised 78.8 percent of total portfolio loans at June 30, 2020 and 77.2 percent at December 31, 2019. Total portfolio loans increased $411.4 million to $7.5 billion at June 30, 2020 compared to $7.1 billion at December 31, 2019. The increase of $432.3 million in commercial loans related to $419.5 million in C&I, which included $547.6 million of loans from the PPP, and $83.8 million in commercial construction loans offset by a decrease of $71.0 million in CRE compared to December 31, 2019. Excluding the PPP loans, portfolio loans decreased $136.2 million compared to December 31, 2019 due to decreased activity related to the COVID-19 pandemic.
As of June 30, 2020, we originated $547.6 million of PPP loans. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted expenses in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00 percent and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100 percent guaranteed by the SBA. The SBA pays us a processing fee ranging from 1 percent to 5 percent based on the size of the loan.
Consumer loans represent 21.2 percent of our total portfolio loans at June 30, 2020 and 22.8 percent at December 31, 2019. Consumer loans decreased $20.9 million compared to December 31, 2019 with the decrease of $27.6 million in residential mortgages offset by increases in all other categories. Consumer construction increased $4.7 million, home equity increased $1.2 million and installment and other consumer increased $0.8 million.
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 a loan 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) CRE, 3) 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 healthcare. 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.
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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.
The following table presents activity in the ACL for the periods presented:
  Three Months Ended June 30, 2020
(dollars in thousands)
Commercial
Real Estate(2)
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 $ 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   
June 30, 2020 December 31, 2019
Ratio of net charge-offs to average loans outstanding 3.58  % *  0.12  %
Allowance for credit losses as a percentage of total loans 1.52  % 0.87  %
Allowance for loan losses as a percentage of total loans - excluding PPP loans 1.64  % 0.87  %
Allowance for credit losses to nonperforming loans 127  % 115  %
* Annualized
(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.
(2)During the three months ended June 30, 2020, we experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme.

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  Six Months Ended June 30, 2020
(dollars in thousands)
Commercial
Real Estate(2)
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   
June 30, 2020 December 31, 2019
Ratio of net charge-offs to average loans outstanding 2.15  % *  0.22  %
* Annualized
(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.
(2)During the three months ended June 30, 2020, we experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme.
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 Annual Report on Form 10-K for the year ended December 31, 2019, but before the end of the first quarter of 2020. The updated information supported that a loss existed at January 1, 2020.
The significant increase in the provision for credit losses of $84.6 million and $99.0 million during the three and six months ended June 30, 2020 was mainly due to the customer fraud that resulted in a $58.7 million charge-off as well as the impact of the COVID-19 pandemic. Net loan charge-offs were $68.1 million, or 0.89 percent of average loans, and $79.2 million, or 1.04 percent of average loans, for the three and six months ended June 30, 2020. In addition to the $58.7 million charge-off from the customer fraud, the customer also had a lending relationship that was moved to nonperforming status for $10.9 million which was net of a $4.2 million loan charge-off during the three months ended June 30, 2020. Other than the customer fraud, the most significant charge-off for the six months ended June 30, 2020 was a $9.9 million C&I relationship. 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; therefore, we recorded a day one CECL adjustment through a $9.9 million specific reserve. The updated information supported a loss existed at January 1, 2020.
Commercial substandard loans increased $16.1 million to $168.8 million at June 30, 2020 compared to $152.7 million at December 31, 2019 and special mention loans increased $78.7 million to $182.6 million at June 30, 2020 compared to $103.9 million at December 31, 2019 due to downgrades as a result of updated financial information.
The adoption of the CECL accounting standard as of January 1, 2020 and the uncertainty around the COVID-19 pandemic both contributed to the higher ACL of 1.52 percent of total portfolio loans as of June 30, 2020 compared to 0.87 percent at December 31, 2019. When excluding PPP loans, the ACL as a percentage of total portfolio loans was 1.64 percent as of June 30, 2020.
TDRs increased $1.4 million to $47.3 million at June 30, 2020 compared to $45.9 million at December 31, 2019. Total TDRs of $47.3 million at June 30, 2020 included $15.5 million, or 32.8 percent, that were accruing and $31.8 million, or 67.2 percent, that were not accruing.
Our allowance for credit losses on unfunded commercial lending commitments and letters of credit provide for the risk of expected loss in these arrangements. The allowance is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a draw-down on the commitment. The provision for credit losses on unfunded loan commitments is included in the provision for credit losses on our Consolidated Statements of Comprehensive (Loss) Income. The allowance for unfunded loan commitments was $7.0 million at June 30, 2020 compared to $3.1 million at December 31, 2019. The adoption of ASU 2016-13 resulted in an increase to our allowance for unfunded commitments of $1.4 million on January 1, 2020. We increased the allowance for unfunded loan commitments $0.9 million and $2.5 million during the three and six months ended June 30, 2020, mainly in response to the COVID-19 pandemic. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming assets consist of nonaccrual loans, nonaccrual TDRs and OREO. The following table summarizes nonperforming assets for the dates presented:
(dollars in thousands) June 30, 2020 December 31, 2019 $ Change
Nonperforming Loans
Commercial real estate $ 34,282    $ 22,427    $ 11,855   
Commercial and industrial 6,328    13,287    (6,959)  
Commercial construction 1,504    737    767   
Residential mortgage 13,351    6,697    6,654   
Home equity 2,874    1,961    913   
Installment and other consumer 19    36    (17)  
Total Nonperforming Loans 58,357    45,145    13,212   
Nonperforming Troubled Debt Restructurings
Commercial real estate 27,361    6,713    20,648   
Commercial and industrial 2,156    695    1,461   
Commercial construction —    —    —   
Residential mortgage 1,298    822    476   
Home equity 941    678    263   
Installment and other consumer —    4    (4)  
Total Nonperforming Troubled Debt Restructurings 31,755    8,912    22,843   
Total Nonperforming Loans 90,113    54,057    36,056   
OREO 2,740    3,525    (785)  
Total Nonperforming Assets $ 92,853    $ 57,582    $ 35,271   
Asset Quality Ratios:
Nonperforming loans as a percent of total loans 1.19  % 0.76  %
Nonperforming assets as a percent of total loans plus OREO 1.23  % 0.81  %

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due.
Nonperforming loans increased $36.0 million to $90.1 million at June 30, 2020 compared to $54.1 million at December 31, 2019. The significant increases in nonperforming loans primarily related to the addition of a $20.5 million CRE relationship, the $10.9 million lending relationship related to the customer fraud and a $4.3 million C&I relationship. The $20.5 million CRE relationship became a performing TDR in the third quarter of 2019 and then moved to nonperforming in the first quarter of 2020 when the borrower experienced financial deterioration that led to cash flow issues. The relationship was individually assessed at June 30, 2020, and based upon updated appraisals, a $0.6 million ACL was added due to the relationship being under-collateralized as of June 30, 2020. The $10.9 million lending relationship was moved to nonperforming in the second quarter of 2020.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposits
(dollars in thousands) June 30, 2020 December 31, 2019 $ Change
Customer Deposits
Noninterest-bearing demand $ 2,250,958    $ 1,698,082    $ 552,876   
Interest-bearing demand 855,193    762,111    93,082   
Money market 2,021,552    1,849,684    171,868   
Savings 916,268    830,919    85,349   
Certificates of deposit 1,487,367    1,535,305    (47,938)  
Total Customer Deposits 7,531,338    6,676,101    855,237   
Brokered Deposits
Interest-bearing demand 200,068    200,220    (152)  
Money market 100,036    100,127    (91)  
Certificates of deposit 36,474    60,128    (23,654)  
Total Brokered Deposits 336,578    360,475    (23,897)  
Total Deposits $ 7,867,916    $ 7,036,576    $ 831,340   
Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new deposits. Total deposits at June 30, 2020 increased $831.3 million from December 31, 2019. Total customer deposits increased $855.2 million from December 31, 2019. The increase in customer deposits primarily related to PPP and stimulus programs along with customers conservatively holding cash deposits during these uncertain times. Customer noninterest-bearing demand deposits increased $552.9 million, money market deposits increased $171.8 million, interest-bearing demand deposits increased $93.1 million, and savings deposits increased $85.3 million. These increases were offset by a decline in certificate of deposits of $47.9 million which was mainly a result of repositioning by our customers. Total brokered deposits decreased $23.9 million from December 31, 2019 due to the customer deposit growth. Brokered deposits are an additional source of funds utilized by ALCO as a way to diversify funding sources, as well as manage our funding costs and structure.
Borrowings
(dollars in thousands) June 30, 2020 December 31, 2019 $ Change
Securities sold under repurchase agreements $ 92,159    $ 19,888    $ 72,271   
Short-term borrowings 84,541    281,319    (196,778)  
Long-term borrowings 49,489    50,868    (1,379)  
Junior subordinated debt securities 64,053    64,277    (224)  
Total Borrowings $ 290,242    $ 416,352    $ (126,110)  
Borrowings are an additional source of funding for us. Total borrowings decreased $126.1 million, or 30.3 percent, compared to December 31, 2019 due to increased customer deposits. Total short-term borrowings decreased $196.8 million, or 69.9 percent, compared to December 31, 2019. Securities sold under repurchase agreements increased $72.3 million to $92.2 million at June 30, 2020 compared to December 31, 2019 due to demand from our REPO customers.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information pertaining to short-term borrowings is summarized in the tables below for the six months ended June 30, 2020 and for the twelve months ended December 31, 2019.
  Securities Sold Under Repurchase Agreements
(dollars in thousands) June 30, 2020 December 31, 2019
Balance at the period end $ 92,159    $ 19,888   
Average balance during the period $ 58,046    $ 16,863   
Average interest rate during the period 0.33  % 0.65  %
Maximum month-end balance during the period $ 92,159    $ 23,427   
Average interest rate at the period end 0.25  % 0.74  %
  Short-Term Borrowings
(dollars in thousands) June 30, 2020 December 31, 2019
Balance at the period end $ 84,541    $ 281,319   
Average balance during the period $ 232,319    $ 255,264   
Average interest rate during the period 1.14  % 2.51  %
Maximum month-end balance during the period $ 410,240    $ 425,000   
Average interest rate at the period end 0.38  % 1.84  %
Information pertaining to long-term borrowings is summarized in the tables below for the six months ended June 30, 2020 and for the twelve months ended December 31, 2019.
  Long-Term Borrowings
(dollars in thousands) June 30, 2020 December 31, 2019
Balance at the period end $ 49,489    $ 50,868   
Average balance during the period $ 50,809    $ 66,392   
Average interest rate during the period 2.53  % 2.76  %
Maximum month-end balance during the period $ 50,635    $ 70,418   
Average interest rate at the period end 2.48  % 2.61  %
  Junior Subordinated Debt Securities
(dollars in thousands) June 30, 2020 December 31, 2019
Balance at the period end $ 64,053    $ 64,277   
Average balance during the period $ 64,120    $ 47,934   
Average interest rate during the period 3.99  % 4.82  %
Maximum month-end balance during the period $ 64,648    $ 64,277   
Average interest rate at the period end 3.31  % 4.42  %
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or of borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk, our Board of Directors has delegated authority to ALCO for the formulation, implementation, and oversight of liquidity risk management for S&T. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.
Our primary funding and liquidity source is a stable customer deposit base. We believe S&T has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile sources. Refer to the "Financial Condition-Deposits" section of this MD&A, for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to S&T include borrowing availability at the FHLB of Pittsburgh, federal funds lines with other financial institutions, the brokered deposit market and borrowing availability through the Federal Reserve Borrower-In-Custody program.
An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At June 30, 2020, we had $751.3 million in highly liquid assets, which consisted of $275.9 million in interest-bearing deposits with banks, $461.1 million in unpledged securities and $14.3 million in loans held for sale. This resulted in a highly liquid assets to total assets ratio of 7.9 percent at June 30, 2020. Also, at June 30, 2020, we had a remaining borrowing availability of $2.7 billion with the FHLB of Pittsburgh. Refer to Note 9: Borrowings in the Notes to Consolidated Financial Statements and the "Financial Condition- Borrowings" section of this MD&A for more details.
The following table summarizes capital amounts and ratios for S&T and S&T Bank for the dates presented:
(dollars in thousands) Adequately
Capitalized 		Well-
Capitalized 		June 30, 2020 December 31, 2019
Amount Ratio Amount Ratio
S&T Bancorp, Inc.
Tier 1 leverage 4.00  % 5.00  % $ 805,665    8.89  % $ 854,146    10.29  %
Common equity tier 1 to risk-weighted assets 4.50  % 6.50  % 776,665    10.70  % 825,146    11.43  %
Tier 1 capital to risk-weighted assets 6.00  % 8.00  % 805,665    11.10  % 854,146    11.84  %
Total capital to risk-weighted assets 8.00  % 10.00  % 924,487    12.74  % 954,094    13.22  %
S&T Bank
Tier 1 leverage 4.00  % 5.00  % $ 782,192    8.64  % $ 832,113    10.04  %
Common equity tier 1 to risk-weighted assets 4.50  % 6.50  % 782,192    10.80  % 832,113    11.56  %
Tier 1 capital to risk-weighted assets 6.00  % 8.00  % 782,192    10.80  % 832,113    11.56  %
Total capital to risk-weighted assets 8.00  % 10.00  % 893,213    12.33  % 922,310    12.81  %
On March 27, 2020, the regulators issued interim final rule, or IFR, “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The IFR provides financial institutions that adopt CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided by the initial two-year delay (“five year transition”). We adopted CECL effective January 1, 2020 and elected to implement the five year transition.
We have filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, with the SEC, which allows for the issuance of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to subsidiaries, possible acquisitions and stock repurchases. As of June 30, 2020, we had not issued any securities pursuant to this shelf registration statement.
S&T is monitoring and will continue to monitor the impact of the COVID-19 pandemic and has taken and will continue to take steps to mitigate the potential risks and impact on our liquidity and capital resources. Due to the economic uncertainty, we are taking a prudent approach to capital management and have established access to the Federal Reserve’s PPP Lending Facility.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can adversely affect a financial institution’s earnings or capital. For most financial institutions, including S&T, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes also affect capital by changing the net present value of a bank’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancing shareholder value. However, excessive interest rate risk can threaten a bank’s earnings, capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by ALCO. ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analyses and by performing stress tests and simulations in order to mitigate earnings and market value fluctuations due to changes in interest rates.
Rate shock analyses results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 and 24 months of pretax net interest income. The base case and rate shock analyses are performed on a static balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and also include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of loans and securities with optionality. S&T policy guidelines limit the change in pretax net interest income over 12 and 24 month horizons using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in pretax net interest income by graduated risk tolerance levels of minimal, moderate and high. We have temporarily suspended the analyses on downward rate shocks of 200 basis points or more because they do not provide meaningful insight into our interest rate risk position.
In order to monitor interest rate risk beyond the 24 month time horizon of rate shocks on pretax net interest income, we also perform EVE analyses. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analyses on pretax net interest income, EVE analyses incorporate management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non-maturity deposit products. S&T policy guidelines limit the change in EVE using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in EVE by graduated risk tolerance levels of minimal, moderate and high. We have also temporarily suspended the downward rate shocks of 200 basis points or more for EVE.
The table below reflects the rate shock analyses results for the 1 - 12 and 13 - 24 month periods of pretax net interest income and EVE.
June 30, 2020 December 31, 2019
1 - 12 Months 13 - 24 Months % Change in EVE 1 - 12 Months 13 - 24 Months % Change in EVE
Change in Interest Rate (basis points)
% Change in Pretax
Net Interest Income 		% Change in
 Pretax
Net Interest Income 		% Change in Pretax
Net Interest Income 		% Change in Pretax
Net Interest Income
 400 14.6 % 20.4 % 21.6 % 9.6  % 14.4  % (1.8) %
 300 10.8 % 15.3 % 23.0 % 7.2  % 10.8  % 2.8  %
 200 7.6 % 10.8 % 21.6 % 5.0  % 7.6  % 5.5  %
 100 4.5 % 6.3 % 15.2 % 2.7  % 4.2  % 5.1  %
(100) (3.0) % (5.1) % (28.7) % (4.3) % (6.4) % (10.8) %
(200)  NM  NM  NM NM NM NM
NM - not meaningful

The results from the rate shock analyses on net interest income are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive balance sheet will differ depending upon the change in market interest rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in net interest income and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in net interest income and operating income.
Our rate shock analyses show an improvement in the percentage change in pretax net interest income in the 1-12 month and 13-24 month rates up scenarios and rates down scenarios when comparing June 30, 2020 to December 31, 2019. Our EVE analyses show an improvement in the percentage change in EVE in the rates up scenarios and a decline in the rates down scenario when comparing June 30, 2020 to December 31, 2019.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to rate shocks and EVE analyses, we perform a market risk stress test at least annually. The market risk stress test includes sensitivity analyses and simulations. Sensitivity analyses are performed to help us identify which model assumptions cause the greatest impact on pretax net interest income. Sensitivity analyses may include changing prepayment behavior of loans and securities with optionality and the impact of interest rate changes on non-maturity deposit products. Simulation analyses may include the potential impact of rate changes other than the policy guidelines, yield curve shape changes, significant balance mix changes and various growth scenarios.
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Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of S&T’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of June 30, 2020. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to S&T’s management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material respects, as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2020, there were no changes made to S&T’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, S&T’s internal control over financial reporting.


PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes to the risk factors that we have previously disclosed in Part I, Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 2, 2020 other than the risks described below.
The duration and severity of the COVID-19 pandemic, in our principal area of operations, nationally and globally, has impacted and could adversely impact S&T’s business, results of operations and financial condition. While it is difficult to predict the further impact of the COVID-19 pandemic (or any other outbreak) on the economy and S&T, the future impacts may include, but are not limited to, the following:

•Our results of operations may be negatively impacted by general economic or business conditions and uncertainty, including the strength of economic conditions in our principal area of operations impacting the demand for our products and services.
•The low interest rate environment will continue to negatively impact our net interest income and net interest margin.
•Credit losses may be higher and our provision for credit losses may continue to increase, due to deterioration in the financial condition of S&T’s commercial and consumer loan customers.
•Declining asset and collateral values may necessitate increases in our provision for credit losses and net charge-offs.
•Expense management will be impacted by the uncertainty of the effects of the pandemic and S&T’s continued efforts to promote the health and safety of our employees, and the customers and communities we serve.
•We may have an interruption or cessation of an important service provided by a third-party provider.
•S&T’s liquidity and regulatory capital could be adversely impacted.
•Any new or revised regulations regarding capital and liquidity adopted in response to the COVID-19 pandemic may require us to maintain materially more capital or liquidity.
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•Investors may have less confidence in the equity markets in general and in financial services industry in particular, which could have a negative impact on S&T’s stock price and resulting market valuation.
To the extent the COVID-19 pandemic continues to adversely affect the global economy it may also increase the likelihood and/or magnitude of other risks described in the Part I, Item IA. “Risk Factors” in S&T’s Annual Report on Form 10-K for the year ended December 31, 2019.
The impact that the COVID-19 pandemic will have on S&T’s credit losses is uncertain, and continued economic uncertainty and deterioration since January 1, 2020 in the forward looking economic forecasts used to estimate credit losses may adversely affect our ACL.
S&T calculates the ACL in accordance with CECL accounting standard adopted January 1, 2020. The CECL methodology reflects expected credit losses and requires consideration of a broad range of reasonable and supportable information to form credit loss estimates. The CECL accounting standard bases the measurement of expected credit losses on historical loss experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. S&T’s ability to assess expected credit losses may be impaired if the models and approaches we use become less predictive of future behaviors. In particular, the reliance on supportable economic forecasts in light of the COVID-19 pandemic has had and is expected to have an impact on the estimates of our ACL. These forecasts have deteriorated since January 1, 2020 and continued adverse economic forecasts and economic uncertainty could negatively affect our ACL.
Fraudulent activity associated with our products and services could adversely affect our results of operations, financial condition and stock price, negatively impact our brand and reputation, and result in regulatory intervention or sanctions.
As a financial institution we are exposed to operational risk in the form of fraudulent activity that may be committed by customers, other third parties, or employees, targeting us and our customers. The risk of fraud continues to increase for the financial services industry. In our Form 8-K filed May 26, 2020, we disclosed that we discovered customer fraud resulting from a check kiting scheme by a business customer of S&T. We recognized a pre-tax loss of $58.7 million during the second quarter of 2020 related to this customer fraud. As a result of our internal review of the fraud, we have made process and monitoring enhancements that are substantially implemented. While we believe we have operational risk controls in place to prevent or detect future instances of fraud or to mitigate the impact of any fraud, we cannot provide assurance that we can prevent or detect fraud or that we will not experience future fraud losses or incur costs or other damage related to such fraud, at levels that adversely affect our results of operation, financial condition, or stock price. Furthermore, fraudulent activity could negatively impact our brand and reputation, which could also adversely affect our results of operation, financial condition, or stock price. Fraudulent activity could also lead to regulatory intervention or regulatory sanctions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
The following table is a summary of our purchases of common stock during the second quarter of 2020:
Period Total number of shares purchased Average price paid per share
Total number of shares purchased as part of publicly announced plan(1)
Approximate dollar value of shares that may yet be purchased under the plan
$37,441,683   
04/01/2020 - 04/30/2020 —    —    —    37,441,683   
05/01/2020 - 05/31/2020 —    —    —    37,441,683   
06/01/2020 - 06/30/2020 —    —    —    37,441,683   
Total —    $—    —    $37,441,683   
(1)On September 16, 2019, our Board of Directors authorized a $50 million share repurchase plan. This repurchase authorization, which is effective through March 31, 2021, permits S&T to repurchase from time to time up to $50 million in aggregate value of shares of S&T's common stock through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at the discretion of S&T and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and S&T's financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. We expect to fund any repurchases from cash on hand and internally generated funds. Repurchase activity was suspended in March 2020 as the impact of the COVID-19 pandemic spread.

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Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
On August 4, 2020, we entered into a severance and general release agreement with David P. Ruddock in connection with his previously announced resignation. Under the terms of the agreement, Mr. Ruddock will receive (a) a total gross payment of three hundred thirty-five thousand, four hundred and fifty dollars ($335,450.00), paid in three installments: (i) the first payment of one half of this total to be made within thirty days after the seven (7) day revocation period provided to Mr. Ruddock in the agreement expires without a revocation (in the gross amount of $167,725.00), and the remaining two payments, each for one quarter of the total - one in December 2020 and the final payment made on August 2, 2021 (each in the gross amount of $83,862.50) (b) payment of his COBRA health insurance coverage for twelve (12) months or until he obtains coverage from a new employer, (c) an additional amount of thirty-two thousand dollars ($32,000.00) within thirty days after the revocation period expires without a revocation, and (d) ownership of the S&T automobile and cell phone with Mr. Ruddock assuming operations, maintenance, insurance and all other cost and responsibilities regarding them.
Item 6. Exhibits
2.1
Agreement and Plan of Merger, dated June 5, 2019, by and between DNB Financial Corporation and S&T Bancorp, Inc. Filed as Exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on June 5, 2019, and incorporated herein by reference.
Severance and General Release Agreement, dated August 4, 2020, by and between David P. Ruddock and S&T Bancorp, Inc., S&T Bank and any of their subsidiaries or affiliated business*
Filed herewith
Rule 13a-14(a) Certification of the Chief Executive Officer. Filed herewith
Rule 13a-14(a) Certification of the Chief Financial Officer. Filed herewith
32
Rule 13a-14(b) Certification of the Chief Executive Officer and Chief Financial Officer. Filed herewith
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File ((formatted as Inline XBRL and contained in Exhibits 101))
*  Management Contract or Compensatory Plan or Arrangement
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S&T BANCORP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
S&T Bancorp, Inc.
(Registrant)
August 5, 2020 /s Mark Kochvar
Mark Kochvar
Senior Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Signatory)
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Exhibit 31.1
CERTIFICATION
I, Todd D. Brice, certify that:

1.I have reviewed this quarterly report on Form 10-Q of S&T Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 5, 2020
 
/s/ Todd D. Brice
Todd D. Brice, Chief Executive Officer (Principal Executive Officer)


Exhibit 31.2
CERTIFICATION
I, Mark Kochvar, certify that:

1.I have reviewed this quarterly report on Form 10-Q of S&T Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation;
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 5, 2020
 
/s/ Mark Kochvar
Mark Kochvar, Chief Financial Officer (Principal Financial Officer)


Exhibit 32
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
SARBANES-OXLEY ACT SECTION 906
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the S&T Bancorp, Inc. (the “Company”) Quarterly Report on Form 10-Q for the period ended June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd D. Brice, Chief Executive Officer of the Company, and I, Mark Kochvar, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and period covered by the Report.
This certificate is being made for the exclusive purpose of compliance by the Chief Executive Officer and Chief Financial Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law.
Date: August 5, 2020
 
/s/ Todd D. Brice   /s/ Mark Kochvar
Todd D. Brice, Chief Executive Officer (Principal Executive Officer)   Mark Kochvar, Chief Financial Officer (Principal Financial Officer)