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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-01 · 500 added, 444 removed, 675 unchanged (58% of the section changed)

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”, “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;

legislation affecting the financial services industry as a whole, and S&T, in particular;

climate change and related legislative and regulatory initiatives;

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 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, particularly in light of the strong competition in the marketplace;

our ability to successfully manage our CEO transition;

general economic or business conditions, including the strength of regional economic conditions in our market area;

macroeconomic conditions including inflation and economic uncertainty;

the duration and severity of the coronavirus, or 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

value in a business combination.

There is no provision for credit losses, or PCL, recognized upon acquisition of a PCD loan since the initial allowance is established through the purchase accounting.

After initial recognition, the accounting for a PCD loan follows the credit loss model that applies to that type of asset.

Purchased financial loans that do not have a more-than-significant deterioration in credit quality since origination are accounted for in a manner consistent with originated loans.

An ACL is recorded with a corresponding charge to PCL.

Subsequent to the acquisition date, the methods utilized to estimate the required ACL for these loans is similar to the method used for originated loans.

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

Measurement of Credit Losses on Financial Instruments, the methods utilized to estimate the required ALL for acquired loans was similar to the method used for originated loans;

however, we recorded a provision for credit losses only when the required allowance exceeded the remaining fair value adjustment.

Acquired loans were considered impaired if there was evidence of credit deterioration since origination and if it was probable at time of acquisition that all contractually required payments would not be collected.

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.

Further, we view critical accounting estimates as those estimates made in accordance with

GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations.

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

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for critical accounting policies and estimates for the prior year.

We did not significantly change the manner in which we applied our critical accounting policies or developed related assumptions or estimates during 2021.

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

Allowance for Credit Losses

In January 2020, we adopted ASC 326, which replaced the former incurred loss methodology with an expected credit loss methodology that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset.

The allowance for credit losses, or ACL, is a valuation reserve established and maintained by charges against operating income.

It is an estimate of expected credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions and forecasts of future economic conditions.

Management’s evaluation process used to determine the appropriateness of the ACL is complex and requires the use of estimates, assumptions and judgments which are inherently subject to high uncertainty.

The evaluation process combines several factors:

historical loan loss experience, managements ongoing review of lending policies and practices, experience and depth of staff, quality of the loan grading system, the fair value of underlying collateral, concentration of loans to specific borrowers or industries, existing economic conditions and forecasts, segment specific risks and other quantitative and qualitative factors which could affect future credit losses.

Our reasonable and supportable forecast is based primarily on the national unemployment forecast produced by the Federal Reserve and is for a period of two years.

For periods beyond our two-year forecast, we revert to historical loss rates utilizing a straight-line method over a one-year reversion period.

Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and the appropriateness of the ACL could change significantly.

It is challenging to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

In conjunction with our capital stress testing process, we consider different economic scenarios that impact the ACL.

Among other balance sheet and income statement changes, our severely adverse scenario would have resulted in an increase to the ACL of approximately 80 percent.

This stressed scenario includes both the quantitative and qualitative components of the model.

This severely adverse scenario shows how sensitive the ACL can be to key qualitative and quantitative assumptions underlying the overall ACL calculation.

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.

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.

The acquisition method of accounting requires that assets acquired and liabilities assumed in business combinations are recorded at their fair values.

This often involves estimates based on third party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques which are inherently subjective.

Business combinations also typically result in goodwill which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the acquired goodwill relates.

The carrying value of goodwill is tested annually for impairment each October 1st or more frequently if events and

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

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.

An impairment charge would be recognized if the 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 last completed a quantitative goodwill impairment test as of November 30, 2020 and concluded that goodwill was not impaired.

A discount rate of 11.50 percent was used for the income approach.

If the discount rate was increased 2 percent to 13.50 percent, our fair value would have still exceeded carrying value resulting in no goodwill impairment.

Based upon our qualitative assessment performed for our annual impairment analysis as of October 1, 2021, we concluded that goodwill is not impaired.

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.

Recent Accounting Pronouncements and Developments

Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which is included in Part II, Item 8 of this Report, discusses new accounting pronouncements that we have adopted and the expected impact of accounting pronouncements recently issued or proposed, but not yet required to be adopted.

Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which is included in Part II, Item 8 Financial Statements and Supplementary Data of this Report, discusses new accounting pronouncements that we have adopted and the expected impact of accounting pronouncements recently issued or proposed, but not yet required to be adopted.

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.

See discussion of net interest income on an FTE basis (non-GAAP) and the efficiency ratio (non-GAAP) and related reconciliations to GAAP discussed below.

Executive Overview

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We strive to do this by delivering exceptional service and value.

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.

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.

As we continue to 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, including our hotel portfolio.

We have increased our 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, as interest rates declined in the first half of 2020.

Our net interest income is also being impacted by declining loan balances as new loan originations have decreased in the current environment.

Offsetting this impact was the origination of $555.9 million of Paycheck Protection Program, or PPP, loans during 2020.

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 we believe that we have sufficient excess capital to manage through 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 November 30, 2020 and updated our analysis as of December 31, 2020.

Based upon our impairment analysis, we determined that our goodwill of $373.4 million was not impaired at December 31, 2020.

We experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme during 2020.

This matter was disclosed in our Form 8-K filed on May 26, 2020.

The fraud was perpetrated by a single business customer and the customer has plead guilty in a criminal investigation.

This fraud loss reduced net income by $46.3 million, or $1.19 per diluted share, in 2020.

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 implemented.

The customer also

On August 23, 2021, Christopher McComish joined S&T as our new chief executive officer.

He brings over 34 years of proven banking leadership with a track record of growth and transformation of commercial, consumer and wealth businesses.

Additionally, we have elevated both proven internal leaders and attracted external talent from larger banking institutions to position us for future growth.

Our priorities for 2022 and beyond include pursuing high impact growth initiatives, ensuring rigorous credit risk and enterprise governance practices, advancing strategic infrastructure and platform investments, investing in organization talent and performance and promoting strategic clarity and effective communications.

Organic loan growth continues to be our top priority within our current footprint and through market expansion.

Our growth strategy includes a collaborative model that combines expertise from all areas of our business and focuses on satisfying each customer’s individual financial objectives.We also actively evaluate acquisition opportunities that align with our strategic objectives as another source of growth.

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

had a lending relationship of $14.8 million, including a $14.0 million CRE loan and an $0.8 million line of credit.

We recognized a $8.9 million charge-off related to this lending relationship during 2020.

Results of Operations

Year Ended December 31, 2021

COVID-19 Update

S&T has monitored the impact of the COVID-19 pandemic throughout the year 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.

COVID-19 Pandemic Update

S&T continues to monitor 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 taken extensive safety measures for our customers in our branches 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.

Our Business Continuity teams were activated and have guided our response efforts.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law.

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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, was signed into law on April 24, 2020.

The PPP and Health Care Enhancement Act, or PPP/HCEA, was signed into law on April 24, 2020.

The PPP/HCEA 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 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 December 31, 2020, we originated $555.9 million of PPP loans.

On July 4, 2020, legislation was passed to extend the application period for the PPP through August 8, 2020.These loans are intended to cover eight weeks of payroll and other permitted expenses to help those businesses remain viable.

The PPP ended on May 31, 2021.

We originated $771.5 million of PPP loans during 2020 and 2021.

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.

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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 for each of the quarters ended in 2020 compared to December 31, 2019, and exclusive of the increase in portfolio loans due to the PPP portfolio, a decrease in portfolio loans compared to December 31, 2019.

The severity and length of the COVID-19 pandemic’s impact on S&T and the U.S.

and global economies continues to be unknown.

The extent to which the COVID-19 pandemic may adversely impact our business depends on future developments, which remain highly uncertain and unpredictable.

The 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 severity and length of the pandemic’s impact on S&T and the U.S.

and global economies continue to be unknown.

Our financial performance continues to be negatively impacted in many ways due to the pandemic.

We are closely monitoring our asset quality with a focus on the loan portfolios that have been significantly impacted by the pandemic, including hotel, healthcare and C&I portfolios.

We have increased our ACL to be responsive to this additional risk within our loan portfolio.

We did experience improvement in our asset quality during 2021, but remain cautious given the current environment.

The hotel portfolio improved in the second half of 2021 with $34.0 million of loans being returned to performing status due to improved operating performance.

Our balance sheet is asset sensitive resulting in our net interest income and net interest margin, or NIM, being negatively impacted in this low interest rate environment.

Loan demand was challenging in the first half of 2021, but we saw growth trends improving late in the second quarter and for the third and fourth quarter of 2021.

Net interest income was favorably impacted by PPP loans which contributed to net interest income $17.3 million for 2021 and $11.4 million for 2020.

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 provided needs-based payment deferrals and modifications to interest only periods to commercial loans during 2020 totaling $1.2 billion.

• We provided needs-based payment deferrals and modifications to interest only periods to commercial loans during 2020 and 2021 totaling $995.7 million.

Only $28.8 million remain on deferral at December 31, 2021.

• We provided loan payment deferrals, with no negative credit bureau reporting, to mortgage and consumer loans during 2020 totaling $69.0 million.

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

• We provided loan payment deferrals, with no negative credit bureau reporting, to mortgage and consumer loans during 2020 and 2021 totaling $81.6 million.

No loans remain on deferral at December 31, 2021.

• We paused foreclosures/repossessions for mortgages and consumer loans.

None of these were designated troubled debt restructurings, or TDRs, for accounting purposes.

Earnings Summary

Net income decreased $77.2 million, or 78.6 percent, to $21.0 million, or $0.53 per diluted share, in 2020 compared to $98.2 million, or $2.82 per diluted share in 2019.

Net income in 2020 was significantly impacted by a $46.3 million after-tax, or $1.19 per diluted share, fraud loss.

The 2019 results included $11.4 million, or $0.27 per diluted share, of merger related

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

The DNB merger results have been included in our financial statements since the consummation of the merger on November 30, 2019.

Net interest income increased $32.6 million, or 13.2 percent, to $279.4 million compared to $246.8 million in 2019 primarily due to the merger with DNB in late 2019.

Average interest-earnings assets increased $1.5 billion, or 21.6 percent, to $8.4 billion compared to 2019.

Average interest-bearing liabilities increased $862.2 million, or 17.7 percent, to $5.7 billion compared to 2019 with increases in average interest-bearing deposits of $923.1 million offset by decreases in borrowings of $61.0 million.

Net interest margin, on a fully taxable-equivalent, or FTE, basis (non-GAAP), decreased 26 basis points to

3.38 percent for 2020 compared to 3.64 percent for 2019.

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.

Net income increased $89.3 million to $110.3 million, or $2.81 per diluted share, in 2021 compared to $21.0 million, or $0.53 per diluted share in 2020.

This net increase was primarily due to a lower provision for credit losses related to improving economic conditions, as well the offsetting impact of the 2020 customer fraud that reduced net income by $46.3 million, or $1.19 per diluted share.We experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme during 2020.

The fraud was perpetrated by a single business customer and the customer has plead guilty in a criminal investigation.

We continue to pursue all available sources of recovery to mitigate the loss.

Return on average assets, or ROA, was 1.18 percent and return on average equity, or ROE, was 9.30 percent for 2021 compared to ROA of 0.23 percent and ROE of 1.80 percent for 2020.

Net interest income decreased $3.3 million to $276.1 million compared to 2020.

The decrease in interest income was primarily due to lower average loan balances and the low rate interest environment compared to 2020.

Average loan balances decreased $325.8 million compared to 2020.

Net interest income was favorably impacted by PPP loans which contributed $17.3 million compared to $11.4 million in 2020.

Average interest-bearing deposits decreased $126.2 million compared to 2020.

The net interest margin, or NIM, on an FTE basis (non-GAAP) decreased 16 basis points compared to 2020.

The decrease is primarily due to higher average cash balances and the low interest rate environment.

PPP loans positively impacted the NIM on an FTE basis (non-GAAP) by 8 basis points compared to the negative impact of 3 basis points in 2020.

NIM is reconciled to net interest income adjusted to an FTE basis (non-GAAP) below in the "Net Interest Income" section of this MD&A.

The provision for credit losses was $16.2 million for 2021 compared to $131.4 million in 2020.

Excluding the customer fraud loss of $58.7 million, the provision for credit losses increased $57.8 million to $72.7 million for 2020 compared to $14.9 million in 2019.

The significant increase in the provision for credit losses during the year was mainly due to the impact of the COVID-19 pandemic and our adoption of CECL on January 1, 2020.

The COVID-19 pandemic has negatively impacted the hospitality industry resulting in deterioration in our $248 million hotel portfolio.

Net loan charge-offs increased $89.7 million to $103.4 million, or 1.40 percent of average loans, for 2020 compared to $13.6 million, or 0.22 percent of average loans, in 2019.

Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.60 percent in 2020.

Total noninterest income increased $7.1 million to $59.7 million compared to $52.6 million in 2019.

Total noninterest income includes a full-year impact of the DNB merger for 2020 compared to one month in 2019.

Additionally, the increase in noninterest income related to an increase of $8.4 million in mortgage banking income to $10.9 million compared to 2019 due to the strong refinance activity in the current interest rate environment.

Noninterest expense increased $19.5 million to $186.6 million for 2020 compared to $167.1 million for 2019.

Total noninterest expense includes a full-year impact of the DNB merger for 2020 compared to one month in 2019 with increases in most noninterest expense categories.

FDIC insurance increased $4.3 million due to the DNB merger, the impact of recent financial results on certain components of the assessment calculation and Small Bank Assessment Credits received in 2019.

These increases were offset by a $9.0 million decrease in merger related expenses compared to 2019.

The income tax provision decreased to nearly zero for 2020 compared to an expense of $19.1 million in 2019.

The decrease in our income tax provision was mainly due to a $96.3 million decrease in taxable income in 2020 compared to 2019.

Excluding a customer fraud loss of $58.7 million, the provision for credit losses was $72.7 million for 2020.

The significant decrease in the provision for credit losses during 2021 was mainly due to the customer fraud in 2020 and an improved outlook for the economy and our loan portfolio.

Net loan charge-offs were $34.5 million, or 0.49 percent of average loans, in 2021 compared to $103.4 million, or 1.40 percent of average loans, during 2020.

Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.61 percent of average loans in 2020.

Noninterest income increased $4.9 million to $64.6 million compared to $59.7 million in 2020.

Wealth management income increased $2.9 million due to customer growth and improved market conditions.

Debit and credit card fees increased $2.9 million and service charges on deposit accounts increased $1.4 million due to increased customer activity.

These were offset by lower commercial loan swap income of $3.6 million and mortgage banking income of $1.2 million.

Noninterest expense increased $2.2 million to $188.8 million compared to $186.6 million in 2020.

Salaries and employee benefits increased $10.1 million primarily due to higher incentives.

Data processing and information technology increased $1.2 million due to new products and services in 2021.

These higher expenses were offset by decreases in other noninterest expense of $4.1 million, merger related expenses of $2.3 million and marketing of $1.4 million.

The efficiency ratio (non-GAAP) for 2021 was 55.05 percent compared to 53.86 percent for 2020.

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.

Below is a reconciliation of the non-GAAP efficiency ratio.

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

2021 2020 2019

Efficiency Ratio (non-GAAP)

Noninterest expense

$188,839 $186,644 $167,116

merger related expenses

— (2,342) (11,350)

Noninterest expense excluding nonrecurring items

$188,839 $184,302 $155,766

Net interest income per consolidated statements of net income

$276,112 $279,388 $246,791

taxable equivalent adjustment

2,316 3,202 3,757

Net interest income (FTE) (non-GAAP)

278,428 282,590 250,548

Noninterest income

64,611 59,719 52,558

net (gains) losses on sale of securities

(29) (142) 26

Net interest income (FTE) (non-GAAP) plus noninterest income

$343,010 $342,167 $303,132

Efficiency ratio (non-GAAP)

55.05 % 53.86 % 51.39 %

The provision for income taxes increased to $25.3 million in 2021 compared to nearly zero for 2020.

The increase in our income tax provision was primarily due to a $114.6 million increase in pretax income in 2021 compared to 2020 when pretax income was impacted by significantly higher provision for credit losses.

The effective tax rate increased to 18.7 percent in 2021 compared to a nominal negative annual effective tax rate in 2020.

The increase in the effective tax rate was primarily due to significantly higher income before taxes in 2021 compared to 2020.

Net Interest Income

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(4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Net interest income on an FTE basis (non-GAAP) increased $32.0 million, or 12.8 percent, compared to 2019.

Net interest income was favorably impacted by purchase accounting fair value adjustments of $4.8 million mainly related to the DNB merger.

The net interest margin on an FTE basis (non-GAAP) decreased 26 basis points to 3.38% compared to 2019.

This is mostly due to decreases in short-term interest rates of approximately 225 basis points.

Purchase accounting fair value adjustments favorably impacted the net interest margin rate on an FTE basis by 6 basis points for 2020.

Interest income on an FTE basis (non-GAAP) decreased $0.6 million, or 0.2 percent, compared to 2019.

The change was primarily due to increases in average interest-earning assets of $1.5 billion offset by lower short-term interest rates compared to 2019.

Average loan balances increased $1.3 billion compared to 2019 due to the DNB merger and organic loan growth.

PPP loans contributed $380.1 million of the average increase in loans.

Net interest income on an FTE basis (non-GAAP) decreased $4.2 million compared to 2020.

The decline was primarily due to lower average loan balances compared to 2020.

Net interest income was favorably impacted by PPP loans which contributed $17.3 million compared to $11.4 million in 2020.

The net interest margin, or NIM, on an FTE basis (non-GAAP) decreased 16 basis points compared to 2020.

The decrease is primarily due to higher average cash balances and the low interest rate environment.

PPP loans positively impacted the net interest margin on an FTE basis (non-GAAP) by 8 basis points compared to the negative impact of 3 basis points in 2020.

Interest income on an FTE basis (non-GAAP) decreased $32.1 million compared to 2020.

The decrease in interest income was primarily due to lower average loan balances compared to 2020 and the continued low interest rate environment.

Average loan balances decreased $325.8 million compared to 2020.

Average PPP loans decreased $53.7 million compared to 2020.

The average rate earned on loans decreased 25 basis points primarily due to lower short-term interest rates.

Average interest-bearing deposits with banks increased $119.9 million and the average rate earned decreased 177 basis points compared to 2019.

Average investment securities increased $86.2 million and the average rate earned decreased 15 basis points.

Average interest-bearing deposits with banks increased $542.2 million compared to 2020 due to PPP loan forgiveness, lower loan balances and a significant increase in average deposits as a result of customer PPP loans and stimulus payments along with customers' liquidity preferences.

Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 50 basis points compared to 2020.

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

Average interest-bearing deposits increased $923.1 million compared to 2019 due to the DNB merger and organic deposit growth.

We experienced deposit growth throughout 2020 due to customer PPP loans and stimulus payments along with customers conservatively holding cash deposits in these uncertain times.

The average rate paid decreased 74 basis points compared to 2019 primarily due to lower short-term interest rates.

Average borrowings decreased $61.0 million due to increased deposits and the average rate paid decreased 120 basis points due to lower short-term interest rates.

Average interest-bearing deposits decreased $126.2 million compared to 2020.

The average rate paid on interest-bearing deposits decreased 46 basis points compared to 2020 primarily due to lower short-term interest rates.

The interest-bearing deposit decreases are favorably offset by a $521.8 million increase in demand deposits.

We experienced demand deposit growth due to customer PPP loans and stimulus payments along with customers' liquidity preferences.

Brokered deposits decreased $216.0 million and borrowings decreased $164.6 million compared to 2020 due to maturities and a reduced need for wholesale funding.

Overall, the cost of interest-bearing liabilities decreased 48 basis points compared to 2020.

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The provision for credit losses, which includes a provision for losses on loans and on unfunded loan 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 $116.5 million to $131.4 million for 2020 compared to $14.9 million for 2019.

We recognized a charge-off of $58.7 million related to a customer fraud from a check kiting scheme during the second quarter of 2020.

The fraud was perpetrated by a single business customer and the customer has plead guilty in a criminal investigation.

We continue to pursue all available sources of recovery to mitigate the loss.

The customer also had a lending relationship of $14.8 million, including a $14.0 million commercial real estate loan and an $0.8 million line of credit which resulted in an additional $8.9 million charge-off in 2020.

At December 31, 2020, $5.9 million remains outstanding as a nonperforming loan that has been fully charged down to the estimated sale price of the collateral.

Excluding the customer fraud loss of $58.7 million, the provision for credit losses increased $57.8 million to $72.7 million for 2020 compared to $14.9 million in 2019.

The significant increase in the provision for credit losses during the year was mainly due to the impact of the COVID-19 pandemic and our adoption of CECL on January 1, 2020.

The COVID-19 pandemic has negatively impacted the hospitality industry resulting in deterioration in our $248 million hotel portfolio.

The impact of COVID-19 was captured in our quantitative reserve as certain impacted loans were downgraded to special mention and substandard and in our qualitative reserve through our economic forecast and other qualitative adjustments.

Commercial special mention, substandard and doubtful loans increased $281 million to $572 million compared to $290 million at December 31, 2019, with an increase of $162 million in substandard loans, $113 million in special mention loans and $11.4 million in doubtful loans.

The increase in both special mention and substandard loans was mainly due to downgrades in our hotel portfolio.

Specific reserves on loans individually assessed increased $11.3 million to $13.5 million compared to $2.2 million in 2019.

Included in the $13.5 million of specific reserves was $6.7 million for loans in our hotel portfolio.

Specific reserves for hotels were based on liquidation values from appraisals received in the fourth quarter of 2020.

Our qualitative reserve increased $14.1 million in 2020 which included $8.6 million for the economic forecast and $3.2 million for portfolio allocations made in our hotel, business banking and C&I portfolios due to the COVID-19 pandemic.

The change in reserve attributed to the economic forecast reflected reductions in the second and third quarters due to an improved economic forecast.

Our forecast covers a period of two years and is driven primarily by national unemployment data.

The change attributed to the portfolio allocations was primarily due to $3.0 million of ACL added for our business banking portfolio.

Net loan charge-offs were $103.4 million, or 1.40% of average loans, in 2020 compared to $13.6 million, or 0.22% of average loans, during 2019.

Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.60% in 2020.

The provision for credit losses decreased $115.2 million to $16.2 million for 2021 compared to $131.4 million for 2020.

Excluding the customer fraud loss of $58.7 million, the provision for credit losses was $72.7 million for 2020.

The significant decrease in the provision for credit losses during 2021 was mainly due to the customer fraud in 2020 and an improved outlook for the economy and our loan portfolio.

Our total qualitative reserve decreased $7.3 million compared to 2020.

The decrease was primarily due to improved economic conditions offset by additional segment allocations for our healthcare and C&I portfolios along with the increased uncertainty at year-end related to the COVID-19 Omicron variant.

Specific reserves on loans individually assessed decreased $11.7 million to $1.8 million at December 31, 2021 compared to $13.5 million in 2020.

The decrease in specific reserves was the result of approximately $7.8 million of loan charge-offs and the release of $5.7 million of specific reserves due to improved operating performance within our hotel portfolio.

Offsetting this decrease in specific reserve was the addition of a $1.8 million specific reserve related to a $21.7 million C&I relationship that also had a $10.3 million charge-off in 2021 based on an estimated enterprise value of the company.

Net loan charge-offs were $34.5 million, or 0.49 percent of average loans, in 2021 compared to $103.4 million, or 1.40 percent of average loans, during 2020.

Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.61 percent of average loans in 2020.

The decrease in net loan charge-offs in 2021 was primarily due to improving economic conditions.

Refer to the Credit Quality section of this MD&A for further details.

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(dollars in thousands) 2021 2020 $ Change % Change

Securities gains, net $ 142 $ (26) $ 168 NM

Debit and credit card 17,952 15,093 2,859 18.9 %

Service charges on deposit accounts 15,040 13,597 1,443 10.6 %

Mortgage banking 10,923 2,491 8,432 338.5 %

Wealth management 12,889 9,957 2,932 29.4 %

Mortgage banking 9,734 10,923 (1,189) (10.9) %

Commercial loan swap income 1,146 4,740 (3,594) (75.8) %

Securities gains, net $ 29 $ 142 $ (113) (79.6) %

Other 7,820 5,267 2,553 48.5 %

Total Noninterest Income $ 64,610 $ 59,719 $ 4,891 8.2 %

NM- percentage change not meaningful

Noninterest income increased $4.9 million, or 8.2 percent, in 2021 compared to 2020.

Total noninterest income includes a full-year impact of the DNB merger for 2020 compared to one month in 2019.

Our noninterest income has been negatively impacted due to changes in our customers' behavior during the pandemic.

The increase in noninterest income primarily related

Wealth management fees increased $2.9 million compared to the prior year.

Brokerage fees increased $1.6 million primarily due to the addition of six new financial advisors added during 2021.

Trust income increased $1.3 million mainly due to new customer growth resulting in higher assets under management and improved market conditions.

Debit and credit card fees increased $2.9 million due to increased debit and credit card usage.

Other noninterest income increased $2.6 million due to a $1.4 million change in the credit valuation adjustment for our commercial loan swaps for risk associated with our hotel loan portfolio, a $0.8 million change in the equity securities portfolio and a $0.5 million change in the valuation of a deferred compensation plan, which has a corresponding offset in salaries and benefit expense resulting in no impact to net income.

Service charges on deposit accounts increased $1.4 million due to the improving economic environment which drove higher customer activity.

Commercial loan swap income decreased $3.6 million due to the lower customer activity related to the pandemic and interest rate environment.

Mortgage banking decreased $1.2 million due to changes in the valuation of the mortgage interest rate locks offset by an improved mortgage servicing rights valuation compared to 2020.

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

to higher mortgage banking income of $8.4 million compared to 2019 due to an increase in the volume of loans originated for sale in the secondary market resulting from a decline in mortgage interest rates.

Debit and credit card fees increased $1.7 million compared to the prior year due to increased debit and credit card usage and the Merger.

Wealth management fees increased $1.3 million due to the Merger.

The $2.1 million decrease in other noninterest income was attributable to a change in the valuation of a deferred compensation plan, which has a corresponding offset in salaries and benefit expense resulting in no impact to net income, a change in the equity securities portfolio and a change in the credit valuation adjustment for our commercial loan swaps for risk associated with our hotel loan portfolio.

Service charges on deposit accounts also decreased $1.6 million due to reduced activity related to the COVID-19 pandemic.

Noninterest Expense

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Data processing and information technology 16,681 15,499 1,182 7.6 %

Net occupancy 14,529 12,103 2,426 20.0 %

Merger-related expenses 2,342 11,350 (9,008) NM

Occupancy 14,544 14,529 15 0.1 %

Furniture, equipment and software 10,684 11,050 (366) (3.3) %

Marketing 5,996 4,631 1,365 29.5 %

Professional services and legal 6,394 4,244 2,150 50.7 %

Other taxes 6,644 6,622 22 0.3 %

Professional services and legal 6,368 6,394 (26) (0.4) %

Marketing 4,553 5,996 (1,443) (24.1) %

FDIC insurance 4,224 5,089 (865) (17.0) %

Other expenses:

Loan related expenses 5,044 3,250 1,794 55.2 %

Joint venture amortization 3,215 2,648 567 21.4 %

Supplies 1,318 1,159 159 13.7 %

Postage 1,262 1,082 180 16.6 %

Amortization of intangibles 2,531 836 1,695 202.8 %

Merger-related expenses — 2,342 (2,342) NM

Other 24,927 29,008 (4,081) (14.1) %

Total Other Noninterest Expense $ 188,839 $ 186,644 $ 2,195 1.2 %

Total Noninterest Expense $ 186,644 $ 167,116 $ 19,528 11.7 %

NM - percentage not meaningful

Noninterest expense increased $2.2 million, or 1.2 percent, to $188.8 million in 2021 compared to 2020.

Total noninterest expense includes a full-year impact of the DNB merger for 2020 compared to one month in 2019.

Total merger expenses decreased $9.0 million compared to 2019.

Total merger related expenses of $2.3 million in 2020 were comprised of $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.

The increases in net occupancy expense, furniture, equipment and software and other taxes related to the DNB merger.

The increase in FDIC insurance of $4.3 million was due to the impact of recent results on certain components of the assessment calculation, such as our net loss in the second quarter of 2020 and also the Small Bank Assessment Credits that were received by all banking institutions with assets of less than $10 billion in third quarter 2019 that were not received in 2020.

Also in addition to the merger, the increase of $3.3 million in other taxes was due to a one-time adjustment related to a state sales tax assessment in 2019.

Salaries and employee benefits increased $6.1 million during 2020 primarily due to additional employees, mainly related to the merger, annual merit increases and higher pension expense due to an increase in retirees electing lump-sum distributions.

Partially offsetting these increases were a decrease in restricted stock of $1.7 million and $3.0 million of deferred origination costs due to PPP loans and increased mortgage activity.

Loan related expenses increased $1.8 million due to the customer fraud and increased mortgage volume.

Professional services and legal expenses increased $2.1 million mainly due to higher legal expense.

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

Federal Income Taxes

The income tax provision was nearly zero compared to $19.1 million in 2019.

The decrease in our income tax provision was mainly due to a $96.3 million decrease in net income before taxes in 2020 compared to 2019.

The effective tax rate, which is total tax expense as a percentage of net income before taxes, decreased 16.3 percent in 2020 to a nominal negative annual effective tax rate compared to 16.3 percent in 2019.

The decrease in the effective tax rate was primarily due to significantly lower net income before taxes in 2020 compared to 2019.

Historically, we have generated an annual effective tax rate that is less than the statutory rate of 21 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on BOLI and tax benefits associated with Low Income Housing Tax Credits, or LIHTC.

Total merger-related expense decreased $2.3 million compared to 2020 due to no merger during 2021.

Salaries and employee benefits increased $10.1 million during 2021 primarily due to higher incentive, restricted stock, commissions and pension expense due to an increase in retirees electing lump-sum distributions.

Data processing and information technology increased $1.2 million due to new products and services in 2021.

Offsetting these increases, other noninterest expense decreased $4.1 million due to lower loan related expenses and lower amortization of both our qualified affordable housing projects and core deposit intangible assets.

Marketing expense decreased $1.4 million due to the pandemic and a reduction in promotions.

FDIC insurance decreased $0.9 million due to the improvement of the financial ratios used to determine the assessment.

The provision for income taxes increased to $25.3 million in 2021 compared to nearly zero for 2020.

The increase in our income tax provision was primarily due to a $114.6 million increase in income before taxes in 2021 compared to 2020 when income before taxes was impacted by a customer fraud of $58.7 million.

The effective tax rate, which is total tax expense as a percentage of income before taxes, increased to 18.7 percent in 2021 compared to a nominal negative annual effective tax rate in 2020.

The increase in the effective tax rate was primarily due to significantly higher income before taxes in 2021 compared to 2020.

Historically, we have generated an annual effective tax rate that is less than the statutory rate of 21 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on Bank Owned Life Insurance, or BOLI, and tax benefits associated with Low Income Housing Tax Credits, or LIHTC.

Results of Operations

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Net income decreased $77.2 million, or 78.6 percent, to $21.0 million, or $0.53 per diluted share, in 2020 compared to $98.2 million, or $2.82 per diluted share in 2019.

Net income in 2020 was significantly impacted by a $46.3 million after-tax, or $1.19 per diluted share, fraud loss.

The 2019 results included $11.4 million, or $0.27 per diluted share, of merger related expenses.

The DNB merger results have been included in our financial statements since the consummation of the merger on November 30, 2019.

The decrease in net income was primarily due to an increase in noninterest expense of $21.7 million, that included $11.4 million of merger related expenses.

This decrease was partially offset by increases in net interest income of $12.4 million and noninterest income of $3.4 million compared to 2018.

Net interest income increased $12.4 million, or 5.3 percent, to $246.8 million compared to $234.4 million in 2018.

Average interest-earning assets increased $335.7 million compared to 2018 to $6.9 billion.

Average interest-bearing liabilities increased $182.5 million with increases in average interest-bearing deposits of $460.8 million offset by decreases in borrowings of $278.3 million.

Net interest margin, on a fully taxable-equivalent, or FTE, basis (non-GAAP), remained unchanged at 3.64 percent.

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 loan losses was $14.9 million for 2019 compared to $15.0 million in 2018.

The DNB Merger results have been included in our financial statements since the consummation of the DNB Merger on November 30, 2019.

Net interest income increased $32.6 million, or 13.2 percent, to $279.4 million compared to $246.8 million in 2019 primarily due to the merger with DNB in late 2019.

Average interest-earnings assets increased $1.5 billion, or 21.6 percent, to $8.4 billion compared to 2019.

Net interest margin, on a fully taxable-equivalent, or FTE, basis (non-GAAP), decreased 26 basis points to 3.38 percent for 2020 compared to 3.64 percent for 2019.

Net interest margin is reconciled to net interest income adjusted to an FTE basis above in the "Results of Operations - Year Ended December 31, 2021 -Net Interest Income" section of this MD&A.

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

The provision for credit losses was $131.4 million for 2020 compared to $14.9 million in 2019.

Excluding the customer fraud loss of $58.7 million, the provision for credit losses increased $57.8 million to $72.7 million for 2020 compared to $14.9 million in 2019.

The significant increase in the provision for credit losses during the year was mainly due to the impact of the COVID-19 pandemic and our adoption of CECL on January 1, 2020.

The COVID-19 pandemic has negatively impacted the hospitality industry resulting in deterioration in our $248 million hotel portfolio.

Net loan charge-offs increased $89.7 million to $103.4 million, or 1.40 percent of average loans, for 2020 compared to $13.6 million, or 0.22 percent of average loans, in 2019.

Nonperforming loans increased $8.0 million and impaired loans increased $25.8 million with an increase in specific reserves of $0.4 million to $2.2 million compared to 2018.

Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.60 percent in 2020.

Total noninterest income increased $7.1 million to $59.7 million compared to $52.6 million in 2019.

The increase in noninterest income primarily related to higher commercial loan swap income of $4.3 million compared to 2018 as we continue to see a high demand for this product in the current interest rate environment.

Offsetting this increase was a $1.9 million gain on the sale of a majority interest in S&T Evergreen Insurance, LLC in 2018.

Wealth management fees decreased $1.5 million compared to the prior year due to a decline in financial service revenue.

Noninterest expense increased $21.7 million in part due to merger related expenses of $11.4 million in 2019, an increase of $7.9 million in salaries and employee benefits and an increase of $3.8 million in data processing and information technology.

These expense increases were partially offset by a $2.8 million decrease in other taxes mainly due to a one-time adjustment related to a state sales tax assessment and a decrease of $2.5 million in FDIC insurance primarily due to Small Bank Assessment Credits that were received during 2019.

The federal income tax provision decrease $1.3 million to $19.1 million in 2019 compared to $17.8 million in 2018.

The increase in our 2019 income tax provision was mainly due to non-recurring items related to the tax benefit from the pension contribution in 2018 offset by the sale of a majority interest of our insurance business in 2018.

Total noninterest income includes a full-year impact of the DNB Merger for 2020 compared to one month in 2019.

Noninterest expense increased $19.5 million to $186.6 million for 2020 compared to $167.1 million for 2019.

Total noninterest expense includes a full-year impact of the DNB Merger for 2020 compared to one month in 2019 with increases in most noninterest expense categories.

FDIC insurance increased $4.3 million due to the DNB Merger, the impact of recent financial results on certain components of the assessment calculation and Small Bank Assessment Credits received in 2019.

These increases were offset by a $9.0 million decrease in merger related expenses compared to 2019.

The income tax provision decreased to nearly zero for 2020 compared to an expense of $19.1 million in 2019.

The decrease in our income tax provision was mainly due to a $96.3 million decrease in taxable income in 2020 compared to 2019.

Net Interest Income

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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 and the dividend-received deduction for equity

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

securities using the federal statutory tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017.

The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities and the dividend-received deduction for equity securities using the federal statutory tax rate of 21 percent 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 Net Income to net interest income and rates on an FTE basis for the periods presented:

Years Ended December 31,

(dollars in thousands) 2019 2018 2017

Total interest income $ 320,484 $ 289,826 $ 260,642

Total interest expense 73,693 55,388 34,909

Net interest income per Consolidated Statements of Net Income 246,791 234,438 225,733

Adjustment to FTE basis 3,757 3,803 7,493

Net Interest Income (FTE) (non-GAAP) $ 250,548 $ 238,241 $ 233,226

Net interest margin 3.58 % 3.58 % 3.45 %

Adjustment to FTE basis 0.06 0.06 0.11

Net Interest Margin (FTE) (non-GAAP) 3.64 % 3.64 % 3.56 %

Net interest margin is reconciled to net interest income adjusted to an FTE basis above in the "Results of Operations - Year Ended December 31, 2021 - Net Interest Income" section of this MD&A.

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

46 unchanged sentences

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017.

(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent .

(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

39 unchanged sentences

(1) Nonaccruing loans are included in the daily average loan amounts outstanding.

(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017.

(2) Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent.

(3) Taxable investment income is adjusted for the dividend-received deduction for equity securities.

1 unchanged sentence

Net interest income on an FTE basis (non-GAAP) increased $32.0 million, or 12.8 percent, compared to 2019.

The net interest margin on an FTE basis (non-GAAP) remained unchanged at 3.64 percent.

Interest income on an FTE basis (non-GAAP) increased $30.6 million, or 10.4 percent, compared to 2018.

The increase was primarily due to an increase in average interest-earning assets of $335.7 million and higher short-term interest rates compared to 2018.

Average loan balances increased $345.3 million and the average rate earned on loans increased 23 basis points primarily due to higher average short-term interest rates.

Average investment securities decreased $4.7 million and the average rate earned increased two basis points.

Overall, the FTE rate on interest-earning assets (non-GAAP) increased 23 basis points compared to 2018.

Net interest income was favorably impacted by purchase accounting fair value adjustments of $4.8 million mainly related to the DNB merger.

The net interest margin on an FTE basis (non-GAAP) decreased 26 basis points to 3.38 percent compared to 2019.

This is mostly due to decreases in short-term interest rates of approximately 225 basis points.

Purchase accounting fair value adjustments favorably impacted the net interest margin rate on an FTE basis by 6 basis points for 2020.

Interest income on an FTE basis (non-GAAP) decreased $0.6 million, or 0.2 percent, compared to 2019.

The change was primarily due to increases in average interest-earning assets of $1.5 billion offset by lower short-term interest rates compared to 2019.

Average loan balances increased $1.3 billion compared to 2019 due to the DNB merger and organic loan growth.

PPP loans contributed $380.1 million of the average increase in loans.

The average rate earned on loans decreased 86 basis points primarily due to lower short-term interest rates.

Average interest-bearing deposits with banks increased $119.9 million and the average rate earned decreased 177 basis points compared to 2019.

Average investment securities increased $86.2 million and the average rate earned decreased 15 basis points.

Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 84 basis points compared to 2019.

Interest expense decreased $32.6 million compared to 2019.

The decrease was primarily due to lower short-term interest

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

Interest expense increased $18.3 million compared to 2018.

The increase was primarily due to an increase in costing liabilities of $182.5 million and higher average short-term interest rates.

Average interest-bearing deposits increased $460.8 million.

Average money market balances increased $392.7 million and the average rate paid increased 39 basis points due to higher average short-term interest rates and promotional pricing.

Average non-interest bearing deposits also increased $99.6 million.

Average borrowings decreased $278.3 million due to increased deposits and the average rate paid increased 57 basis points due to higher average short-term interest rates.

Overall, the cost of interest-bearing liabilities increased 33 basis points compared to 2018.

Provision for Loan Losses

The provision for loan losses is the adjustment to the ALL after net loan charge-offs have been deducted to bring the ALL to a level determined to be adequate to absorb probable losses inherent in the loan portfolio.

The provision for loan losses was$14.9 million for 2019 compared to $15.0 million for 2018.

Commercial special mention, substandard and doubtful loans decreased $11.6 million to $258.7 million compared to $270.3 million at December 31, 2018, with a decrease of $28.5 million in substandard loans offset by increases of $16.5 million in special mention loans and $0.4 million in doubtful loans.

The decrease in substandard loans was mainly due to loan pay-offs and upgrades of risk ratings.

Special mention loans increased due to upgrades from substandard and other downgrades as a result of updated financial information.

Impaired loans increased $25.8 million to $75.3 million at December 31, 2019 compared to $49.5 million at December 31, 2018 with an increase in specific reserves of $0.4 million compared to December 31, 2018.

The increase in specific reserves related to a new $5.4 million CRE impaired loan in the third quarter of 2019 that required a $0.8 million specific reserve at December 31, 2019.

Other new significant impaired loans during 2019 did not require a specific reserve.

Net charge-offs increased $3.2 million to $13.6 million, or 0.22 percent of average loans in 2019, compared to $10.4 million, or 0.18 percent of average loans in 2018.

Total nonperforming loans increased $8.0 million to $54.1 million, or 0.76 percent of total loans at December 31, 2019, compared to $46.1 million, or 0.77 percent of total loans at December 31, 2018.

The increase in nonperforming loans is primarily related to a $10.0 million C&I loan that moved to nonperforming, impaired during the fourth quarter of 2019.

The ALL at December 31, 2019, was $62.2 million, or 0.87 percent of total portfolio loans, compared to $61.0 million, or 1.03 percent of total portfolio loans at December 31, 2018.

The decrease in the level of ALL as a percent of total portfolio loans is due to the DNB merger which added $899.3 million of loans with no carry-over of ALL.

Acquired loans are recorded at fair value at the time of merger.

Refer to the Allowance for Loan Losses section of this MD&A for further details.

Average interest-bearing deposits increased $923.1 million compared to 2019 due to the DNB merger and organic deposit growth.

We experienced deposit growth throughout 2020 due to customer PPP loans and stimulus payments along with customers conservatively holding cash deposits in these uncertain times.

The average rate paid decreased 74 basis points compared to 2019 primarily due to lower short-term interest rates.

Average borrowings decreased $61.0 million due to increased deposits and the average rate paid decreased 120 basis points due to lower short-term interest rates.

Overall, the cost of interest-bearing liabilities decreased 79 basis points compared to 2019.

Provision for Credit Losses