What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-02-28 compared with 2021-03-01 · 27 added, 337 removed, 14 unchanged (96% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Prices and Dividend Information

Our common stock is listed on the NASDAQ Global Select Market System, or NASDAQ, under the symbol STBA.

As of the close of business on January 31, 2022, we had approximately 2,813 shareholders of record.

The number of record-holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.

As discussed under " Our ability to pay dividends on our common stock may be limited." included in Item 1A.

Risk Factors in Part I, the amount and timing of dividends is subject to the discretion of the Board and depends upon business conditions and regulatory requirements.

The Board has the discretion to change the dividend at any time for any reason.

The Board of Directors presently intends to continue the policy of paying quarterly cash dividends.

The amount of any future dividends will depend on economic and market conditions, our financial condition and operating results and other factors, including applicable government regulations and policies.

S&T’s Board of Directors approved a quarterly cash dividend of $0.29 per share on January 24, 2022.

Certain information relating to securities authorized for issuance under equity compensation plans is set forth under the heading Equity Compensation Plan Information in Part III, Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Report.

Purchases of Equity Securities

The following table is a summary of our purchases of common stock during the fourth quarter of 2021:

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

10/1/2021 - 10/31/2021 — $ — — $ 37,441,184

11/1/2021 - 11/30/2021 — — — 37,441,184

12/1/2021 - 12/31/2021 — — — 37,441,184

Total — $ — — $ 37,441,184

(1) On March 15, 2021, our Board of Directors authorized an extension of the $50 million share repurchase plan.

This authorization extended the expiration date of the repurchase plan through March 31, 2022.

The plan permits S&T to repurchase from time to time up to the previously authorized $50 million in aggregate value of shares of S&T's common stock, with $37.4 million of capacity remaining at December 31, 2021, 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.

Share repurchases will not occur unless permissible under applicable laws.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES - continued

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These companies include banks providing a broad range of financial services, including retail banking, loans and money transmissions.

SELECTED FINANCIAL DATA

The tables below summarize selected consolidated financial data as of the dates or for the periods presented and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and the Financial Statements and Supplementary Data in Part II, Item 8 of this Report.

The below tables include the merger with DNB on November 30, 2019, the sale of a majority interest of our insurance business on January 1, 2018 and the effects of the enactment of the Tax Act in 2017.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands) 2020 2019 2018 2017 2016

Total assets $ 8,967,897 $ 8,764,649 $ 7,252,221 $ 7,060,255 $ 6,943,053

Securities, at fair value 773,693 784,283 684,872 698,291 693,487

Loans held for sale 18,528 5,256 2,371 4,485 3,793

Portfolio loans, net of unearned income 7,225,860 7,137,152 5,946,648 5,761,449 5,611,419

Goodwill 373,424 371,621 287,446 291,670 291,670

Total deposits 7,420,538 7,036,576 5,673,922 5,427,891 5,272,377

Securities sold under repurchase agreements 65,163 19,888 18,383 50,161 50,832

Short-term borrowings 75,000 281,319 470,000 540,000 660,000

Long-term borrowings 23,681 50,868 70,314 47,301 14,713

Junior subordinated debt securities 64,083 64,277 45,619 45,619 45,619

Total shareholders’ equity 1,154,711 1,191,998 935,761 884,031 841,956

CONSOLIDATED STATEMENTS OF NET INCOME

Years Ended December 31,

(dollars in thousands) 2020 2019 2018 2017 2016

Interest income $ 320,464 $ 320,484 $ 289,826 $ 260,642 $ 227,774

Interest expense 41,076 73,693 55,388 34,909 24,515

Provision for credit losses 131,424 14,873 14,995 13,883 17,965

Net Interest Income After Provision for Credit Losses 147,964 231,918 219,443 211,850 185,294

Noninterest income 59,719 52,558 49,181 55,462 54,635

Noninterest expense 186,644 167,116 145,445 147,907 143,232

Net Income Before Taxes 21,039 117,360 123,179 119,405 96,697

Provision for income taxes (1) 19,126 17,845 46,437 25,305

Net Income $ 21,040 $ 98,234 $ 105,334 $ 72,968 $ 71,392

SELECTED FINANCIAL DATA - continued

SELECTED PER SHARE DATA AND RATIOS

Refer to Explanation of Use of Non-GAAP Financial Measures below for a discussion of common tangible book value, common return on average tangible common equity and the ratio of tangible common equity to tangible assets as non-GAAP financial measures.

2020 2019 2018 2017 2016

Per Share Data

Earnings per common share—basic $ 0.54 $ 2.84 $ 3.03 $ 2.10 $ 2.06

Earnings per common share—diluted $ 0.53 $ 2.82 $ 3.01 $ 2.09 $ 2.05

Dividends declared per common share $ 1.12 $ 1.09 $ 0.99 $ 0.82 $ 0.77

Dividend payout ratio 200.89 % 38.03 % 32.79 % 39.15 % 37.52 %

Common book value $ 29.38 $ 30.13 $ 26.98 $ 25.28 $ 24.12

Common tangible book value (non-GAAP)

$ 19.71 $ 20.52 $ 18.63 $ 16.87 $ 15.67

Profitability Ratios

Common return on average assets 0.23 % 1.32 % 1.50 % 1.03 % 1.08 %

Common return on average equity 1.80 % 9.98 % 11.60 % 8.37 % 8.67 %

Common return on average tangible common equity (non-GAAP)

2.92 % 14.41 % 17.14 % 12.77 % 13.71 %

Capital Ratios

Common equity/assets 12.88 % 13.60 % 12.90 % 12.52 % 12.13 %

Tangible common equity/tangible assets (non-GAAP)

9.02 % 9.68 % 9.28 % 8.72 % 8.23 %

Tier 1 leverage ratio 9.43 % 10.29 % 10.05 % 9.17 % 8.98 %

Common equity tier 1 11.33 % 11.43 % 11.38 % 10.71 % 10.04 %

Risk-based capital—tier 1 11.74 % 11.84 % 11.72 % 11.06 % 10.39 %

Risk-based capital—total 13.44 % 13.22 % 13.21 % 12.55 % 11.86 %

Asset Quality Ratios

Nonaccrual loans/loans 2.03 % 0.76 % 0.77 % 0.42 % 0.76 %

Nonperforming assets/loans plus OREO 2.06 % 0.81 % 0.83 % 0.42 % 0.77 %

Allowance for credit losses/total portfolio loans 1.63 % 0.87 % 1.03 % 0.98 % 0.94 %

Allowance for credit losses/nonperforming loans 80 % 115 % 132 % 236 % 124 %

Net loan charge-offs/average loans 1.40 % 0.22 % 0.18 % 0.18 % 0.25 %

Explanation of Use of Non-GAAP Financial Measures

In addition to traditional measures presented in accordance with GAAP, our management uses, and this Report contains or references, certain non-GAAP financial measures identified below.

We believe these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry.

Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative 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.

We believe the presentation of net interest income on an FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Interest income per the Consolidated Statements of Net Income is reconciled to net interest income adjusted to an FTE basis in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in this Report.

The efficiency ratio is noninterest expense divided by noninterest income plus net interest income, on an FTE basis, which ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

SELECTED FINANCIAL DATA - continued

Common tangible book value, common return on average tangible common equity and the ratio of tangible common equity to tangible assets exclude goodwill and other intangible assets in order to show the significance of the tangible elements of our assets and common equity.

Total assets and total average assets are reconciled to total tangible assets and total tangible average assets.

Total shareholders' equity and total average shareholders' equity are also reconciled to total tangible common equity and total tangible average common equity.

These measures are consistent with industry practice.

RECONCILIATIONS OF GAAP TO NON-GAAP RATIOS

(dollars in thousands) 2020 2019 2018 2017 2016

Common tangible book value (non-GAAP)

Total shareholders' equity 1,154,711 1,191,998 935,761 884,031 841,956

goodwill and other intangible assets (382,099) (382,540) (290,047) (295,347) (296,580)

Tax effect of other intangible assets 1,822 2,293 546 1,287 1,719

Tangible common equity (non-GAAP) 774,434 811,751 646,260 589,971 547,095

Common shares outstanding 39,298 39,560 34,684 34,972 34,913

Common tangible book value (non-GAAP) 19.71 20.52 18.63 16.87 15.67

Common return on average tangible common shareholders' equity (non-GAAP)

Net income 21,040 98,234 105,334 72,968 71,392

amortization of intangibles 2,532 836 861 1,233 1,615

Tax effect of amortization of intangibles (532) (176) (181) (432) (565)

Net income before amortization of intangibles 23,040 98,894 106,014 73,769 72,442

Total average shareholders’ equity (GAAP Basis) 1,169,489 983,908 908,355 872,130 823,607

average goodwill and average other intangible assets (382,907) (298,228) (290,380) (295,937) (297,377)

Tax effect of other intangible assets 2,061 639 614 1,493 1,992

Tangible average common shareholders' equity (non-GAAP) 788,643 686,319 618,589 577,686 528,222

Common return on average tangible common shareholders' equity (non-GAAP) 2.92 % 14.41 % 17.14 % 12.77 % 13.71 %

Efficiency Ratio (non-GAAP)

Noninterest expense 186,644 167,116 145,445 147,907 143,232

merger related expenses (2,342) (11,350) — — —

Noninterest expense excluding nonrecurring items 184,302 155,766 145,445 147,907 143,232

Net interest income per Consolidated Statements of Net Income 279,388 246,791 234,438 225,733 203,259

taxable equivalent adjustment 3,202 3,757 3,804 7,493 7,043

Noninterest income 59,719 52,558 49,181 55,462 54,635

securities (gains) losses, net (142) 26 — (3,000) —

Net interest income (FTE) (non-GAAP) plus noninterest income 342,167 303,132 287,423 285,688 264,938

Efficiency ratio (non-GAAP) 53.86 % 51.39 % 50.60 % 51.77 % 54.06 %

Tangible common equity (non-GAAP)

Total shareholders' equity (GAAP basis) 1,154,711 1,191,998 935,761 884,031 841,956

goodwill and other intangible assets (382,099) (382,540) (290,047) (295,347) (296,580)

Tax effect of other intangible assets 1,822 2,293 546 1,287 1,719

Tangible common equity (non-GAAP) 774,434 811,751 646,260 589,971 547,095

Total assets (GAAP basis) 8,967,897 8,764,649 7,252,221 7,060,255 6,943,053

goodwill and other intangible assets (382,099) (382,540) (290,047) (295,347) (296,580)

Tax effect of other intangible assets 1,822 2,293 546 1,287 1,719

Tangible assets (non-GAAP) 8,587,620 8,384,402 6,962,720 6,766,195 6,648,192

Tangible common shareholders' equity/tangible assets (non-GAAP) 9.02 % 9.68 % 9.28 % 8.72 % 8.23 %

SELECTED FINANCIAL DATA - continued

The following profitability metrics are adjusted to exclude merger related expenses from the DNB merger for the year ended:

(dollars in thousands) 2020 2019

Diluted Earnings Per Share

Net income $ 21,040 $ 98,234

Adjust for merger related expenses 2,342 11,350

Tax effect of merger related expenses (492) (2,106)

Net income excluding merger related expenses (non-GAAP) $ 22,890 $ 107,478

Average shares outstanding - diluted 39,070 34,723

Diluted adjusted earnings per share (non-GAAP) $ 0.59 $ 3.09

Common Return on Average Tangible Common Shareholders' Equity (non-GAAP)

Net income $ 21,040 $ 98,234

Adjust for merger related expenses 2,342 11,350

Tax effect of merger related expenses (492) (2,106)

Net income excluding merger related expenses 22,890 107,478

amortization of intangibles 2,532 836

Tax effect of amortization of intangibles (532) (176)

Adjusted net income 24,890 108,138

Total average shareholders’ equity (GAAP Basis) 1,169,489 983,908

average goodwill and average other intangible assets (382,907) (298,228)

Tax effect of other intangible assets 2,061 639

Tangible average common shareholders' equity (non-GAAP) $ 788,643 $ 686,319

Common return on average tangible common shareholders' equity (non-GAAP) 3.16 % 15.76 %

Return on Average Assets (non-GAAP)

Net income excluding merger related expenses $ 22,890 $ 107,478

Average total assets 9,152,747 7,435,536

Return on average assets (non-GAAP) 0.25 % 1.45 %

Return on Average Shareholders' Equity (non-GAAP)

Net income excluding merger related expenses $ 22,890 $ 107,478

Average total shareholders' equity 1,169,489 983,908

Return on average shareholders' equity (non-GAAP) 1.96 % 10.92 %

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section reviews our financial condition for each of the past two years and results of operations for each of the past three years.

Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation.

Some tables may include additional time periods to illustrate trends within our Consolidated Financial Statements.

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 Annual Report on Form 10-K 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, or ACL;

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;

the transition from LIBOR as a reference rate;

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;

our ability to successfully manage our CEO transition;

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;

our participation in the Paycheck Protection Program;

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 elsewhere in this report, 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in accordance with U.S.

generally accepted accounting principles, or GAAP.

Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes.

These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements;

accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments.

Certain policies are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported.

Our most significant accounting policies are presented in Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report.

These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the Consolidated Financial Statements and how those values are determined.

We view critical accounting policies to be those which are highly dependent on subjective or complex estimates, assumptions and judgments and where changes in those estimates and assumptions could have a significant impact on the Consolidated Financial Statements.

We currently view the determination of the ACL, goodwill and other intangible assets and accounting for acquisitions to be critical accounting policies.

We have updated our ACL policy in response to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

During 2019, we identified accounting for business combinations as a critical accounting policy due to our merger with DNB.

Otherwise, we did not significantly change the manner in which we applied our critical accounting policies or developed related assumptions or estimates.

We have reviewed these critical accounting estimates and related disclosures with the Audit Committee.

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.

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:

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.

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.

Our quantitative model uses historic data back to the second quarter of 2009.

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 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 bank’s loan review system, value of underlying collateral, 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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

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

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.

Our ACL Committee meets quarterly to verify the overall appropriateness of the ACL.

Additionally, on an annual basis, the ACL Committee meets to validate our ACL methodology.

This validation includes reviewing the loan segmentation, critical model assumptions, forecast and the qualitative framework.

As a result of this ongoing monitoring process, we may make changes to our ACL to be responsive to the economic environment.

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.

Allowance for Loan Losses

Prior to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, we calculated our allowance for loan losses, or ALL, using an incurred loan loss methodology.

The following policy related to the ALL in prior periods.

Our loan portfolio is our largest category of assets on our Consolidated Balance Sheets.

We have designed a systematic ALL methodology which is used to determine our provision for loan losses and ALL on a quarterly basis.

The ALL represents management’s estimate of probable losses inherent in the loan portfolio at the balance sheet date and is presented as a reserve against loans in the Consolidated Balance Sheets.

The ALL is increased by a provision charged to expense and reduced by charge-offs, net of recoveries.

Determination of an adequate ALL is inherently subjective and may be subject to significant changes from period to period.

The methodology for determining the ALL has two main components:

evaluation and impairment tests of individual loans and evaluation and impairment tests of certain groups of homogeneous loans with similar risk characteristics.

We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment.

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the original contractual terms of the loan agreement.

For all troubled debt restructurings, or TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.

Specific reserves are established based upon the following three impairment methods:

1) the present value of expected future cash flows discounted at the loan’s effective interest rate, 2) the loan’s observable market price or 3) the estimated fair value of the collateral if the loan is collateral dependent.

These analyses involve a high degree of judgment in estimating the amount of loss associated with specific impaired loans, including estimating the amount and timing of future cash flows, the current estimated fair value of the loan and collateral values.

Our impairment evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent.

We obtain appraisals annually on impaired loans greater than $0.5 million.

The ALL methodology for groups of homogeneous loans, or the reserve for loans collectively evaluated for impairment, is comprised of both a quantitative and qualitative analysis.

We first apply historical loss rates to pools of loans, with similar risk characteristics, using a migration analysis where losses in each pool are aggregated over the loss emergence period, or LEP.

The LEP is an estimate of the average amount of time from when an event happens that causes the borrower to be unable to pay on a loan until the loss is confirmed through a loan charge-off.

In conjunction with our annual review of the ALL assumptions prior to 2020, we updated our analysis of LEPs for our Commercial and Consumer loan portfolio segments using our loan charge-off history.

Based on our updated analysis, we shortened our LEP over the construction portfolio from 4 years to 3 years and made no other changes.

We estimate an LEP of 3 years for CRE, 3 years for construction and 1.25 years for C&I.

We estimate an LEP of 2.75 years for Consumer Real Estate and 1.25 years for Other Consumer.

Another key assumption is the look-back period, or LBP, which represents the historical period utilized to calculate loss rates.

We used 10.5 years for our LBP for all portfolio segments which encompasses our loss experience during the 2008 - 2010 Financial Crisis and our more recent improved loss experience.

After consideration of the historic loss calculations, management applies additional qualitative adjustments so that the ALL is reflective of the inherent losses that exist in the loan portfolio at the balance sheet date.

Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio, changes in

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

lending management, results of internal loan reviews, asset quality trends, collateral values, concentrations of credit risk and other external factors.

The evaluation of the various components of the ALL requires considerable judgment in order to estimate inherent loss exposures.

Our ALL Committee meets at least quarterly to verify the overall adequacy of the ALL.

Additionally, on an annual basis, the ALL Committee meets to validate our ALL methodology.

This validation includes reviewing the loan segmentation, LEP, LBP and the qualitative framework.

As a result of this ongoing monitoring process, we may make changes to our ALL to be responsive to the economic environment.

Although we believe our process for determining the ALL adequately considers all of 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 provisions for loan losses could be required and could adversely affect our earnings or financial position in future periods.

Goodwill and Other Intangible Assets

As a result of acquisitions, we have recorded goodwill and identifiable intangible assets in our Consolidated Balance Sheets.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired.

We have one reporting unit, Community Banking.

Existing goodwill relates to value inherent in the Community Banking reporting unit and that value is dependent upon our ability to provide quality, cost-effective services in the face of competition from other market participants.

This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of our services.

As such, goodwill value is supported ultimately by profitability that is driven by the volume of business transacted.

A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill, which could adversely impact our earnings in the period in which impairment occurs.

The carrying value of goodwill is tested annually for impairment each October 1st or more frequently if events and circumstances indicate that it may be impaired.

We test for impairment by comparing the fair value of our Community Banking reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.

Determining the fair value of a reporting unit is judgmental and involves the use of significant estimates and assumptions.

The fair value of the reporting unit is determined by using both a discounted cash flow model and market based models.

The discounted cash flow model has many assumptions including future earnings projections, a long-term growth rate and discount rate.

The market based method calculates the fair value based on observed price multiples for similar companies.

The fair values of each method are then weighted based on the relevance and reliability in the current economic environment.

We determine the amount of identifiable intangible assets based upon independent core deposit and insurance contract valuations at the time of acquisition.

Intangible assets with finite useful lives, consisting primarily of core deposit and customer list intangibles, are amortized using straight-line or accelerated methods over their estimated weighted average useful lives, ranging from 10 to 20 years.

Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

No such events or changes in circumstances occurred during the years ended December 31, 2020, 2019 and 2018.

The financial services industry and securities markets can be adversely affected by declining values.

If economic conditions result in a prolonged period of economic weakness in the future, our business may be adversely affected.

In the event that we determine that our goodwill is impaired, recognition of an impairment charge could have a significant adverse impact on our financial position or results of operations in the period in which the impairment occurs.

Business Combinations

We account for business combinations using the acquisition method of accounting.

All identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized and measured as of the acquisition date at fair value.

We record goodwill for the excess of the purchase price over the fair value of net assets acquired.

Results of operations of the acquired entities are included in the consolidated statement of income from the date of acquisition.

Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related ACL.

Determining the fair value of acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

In estimating the fair value of our acquired loans, we considered a number of factors including loss rates, internal risk rating, delinquency status, loan type, loan term, prepayment rates, recovery periods and the current interest rate environment.

The premium or discount estimated through the loan fair value calculation is recognized into interest income on a level yield basis over the remaining life of the loans.

Acquired loans, including those acquired in a business combination, are evaluated to determine if they have experienced more-than-insignificant deterioration in credit quality since origination.

When the condition exists, these loans are referred to as purchased credit deteriorated, or PCD.

An allowance is recognized for a PCD loan by adding it to the purchase price or fair

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What changed 10-K

Item 5. Market for Registrant’s Common Equity