S&T BANCORP INC 10-K

Item 7. 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; unanticipated changes in regulatory and governmental policies impacting interest rates and financial markets; changes in accounting policies, practices or guidance; 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 cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; containing costs and expenses; reliance on significant customer relationships; an interruption or cessation of an important service by a third-party provider; our ability to attract and retain talented executives and employees; general economic or business conditions, including the strength of regional economic conditions in our market area; environmental, social and governance practices and disclosures, including climate change, hiring practices, the diversity of the work force, and racial and social justice issues; 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. 25 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. We did not significantly change the manner in which we applied our critical accounting policies or developed related assumptions or estimates during 2022. 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 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 90 percent. 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. 26 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 the reporting unit with its carrying amount. An impairment charge would be recognized if 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, 2022, we concluded that goodwill is not impaired. 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 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 alternatives to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. The interest income on interest-earning assets, net interest income and net interest margin are presented on an FTE basis (non-GAAP). The FTE basis (non-GAAP) 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 for each period. 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. 27 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table reconciles interest and dividend income per the Consolidated Statements of Net Income to interest income, net interest income and net interest margin on an FTE basis (non-GAAP) for the periods presented: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Total interest and dividend income per Consolidated Statements of Net Income $ 340,751 $ 289,262 $ 320,464 Adjustment to FTE basis 2,052 2,316 3,202 Interest Income on an FTE Basis (Non-GAAP) 342,803 291,578 323,666 Total interest and dividend income per Consolidated Statements of Net Income 340,751 289,262 320,464 Total interest expense 24,968 13,150 41,076 Net Interest Income per Consolidated Statements of Net Income $ 315,783 $ 276,112 $ 279,388 Adjustment to FTE basis 2,052 2,316 3,202 Net Interest Income on an FTE Basis (Non-GAAP) 317,835 278,428 282,590 Net interest margin 3.74 % 3.19 % 3.34 % Adjustment to FTE basis 0.02 0.03 0.04 Net Interest Margin on an FTE Basis (Non-GAAP) 3.76 % 3.22 % 3.38 % The efficiency ratio is noninterest expense divided by noninterest income plus net interest income, on an FTE basis (non-GAAP), 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. Years ended December 31, (dollars in thousands) 2022 2021 2020 Efficiency Ratio (Non-GAAP) Noninterest expense per Consolidated Statements of Net Income $196,746 $188,925 $186,671 Less: merger related expenses — — (2,342) Noninterest expense excluding nonrecurring items $196,746 $188,925 $184,329 Net interest income per Consolidated Statements of Net Income $315,783 $276,112 $279,388 Plus: taxable equivalent adjustment 2,052 2,316 3,202 Net interest income (FTE) (non-GAAP) 317,835 278,428 282,590 Noninterest income per Consolidated Statements of Net Income 58,259 64,696 59,746 Less: net (gains) losses on sale of securities (198) (29) (142) Net interest income (FTE) (non-GAAP) plus noninterest income $375,896 $343,095 $342,194 Efficiency Ratio (Non-GAAP) 52.34 % 55.06 % 53.87 % 28 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Return on average tangible shareholders' equity (non-GAAP) is a key profitability metric used by management to measure financial performance. The following table provides a reconciliation of return on average tangible shareholders' equity (non-GAAP) by reconciling net income (GAAP) per the Consolidated Statements of Net Income to net income before amortization and intangibles and average shareholder's equity to average tangible shareholders' equity for the periods presented: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Net income $ 135,520 $ 110,343 $ 21,040 Plus: amortization of intangibles, net of tax 1,199 1,400 2,001 Net income before amortization of intangibles $ 136,719 $ 111,743 $ 23,041 Average shareholders' equity $ 1,181,788 $ 1,186,161 $ 1,169,489 Less: average goodwill and other intangible assets, net of deferred tax liability (378,303) (379,612) (380,846) Average tangible shareholders' equity $ 803,485 $ 806,549 $ 788,643 Return on Average Tangible Shareholders' Equity (Non-GAAP) 17.02 % 13.85 % 2.92 % Executive Overview We are a bank holding company that is headquartered in Indiana, Pennsylvania with assets of $9.1 billion at December 31, 2022. We operate in Pennsylvania and Ohio. We provide a full range of financial services with retail and commercial banking products, cash management services, trust and brokerage services. Our common stock trades on the NASDAQ Global Select Market under the symbol "STBA." We earn revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. We incur expenses for the cost of deposits and other funding sources, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense. In 2022, we celebrated a great milestone, our 120-year anniversary. We finished 2022 with two consecutive quarters of record net income and earnings per share and record full year net income and earnings per share. We are focused on living our purpose of building a better future together through people-forward banking. Our future at S&T is a world where everything we do daily reflects our purpose and is guided by our values. Our strategic priorities for 2023 and beyond will be focused on our deposit franchise, core profitability, asset quality and talent and engagement. Results of Operations Year Ended December 31, 2022 Earnings Summary Years ended December 31, (dollars in thousands) 2022 2021 2020 Net income $ 135,520 $ 110,343 $ 21,040 Earnings per share - diluted $ 3.46 $ 2.81 $ 0.53 Return on average assets 1.48 % 1.18 % 0.23 % Return on average shareholders' equity 11.47 % 9.30 % 1.80 % Return on average tangible shareholders' equity (non-GAAP) 17.02 % 13.85 % 2.92 % We earned record net income of $135.5 million, an increase of $25.2 million or 22.8 percent, compared to net income of $110.3 million in 2021. Earnings per diluted share increased 23.1 percent to $3.46 in 2022 compared to $2.81 in 2021.The increase in net income was primarily due to higher net interest income related to rising interest rates and a lower provision for credit losses related to improving economic conditions. Net income in 2020 was impacted by a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme. The fraud was perpetrated by a single business customer and 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 increased 30 basis points to 1.48 percent for 2022 compared to 1.18 percent for 2021. Return on average shareholders' equity increased 217 basis points to 11.47 percent for 2022 compared to 9.30 percent for 2021. Net interest income increased $39.7 million, or 14.4 percent, to $315.8 million compared to $276.1 million in 2021. Interest and dividend income increased $51.5 million and interest expense increased $11.8 million compared to 2021. The net 29 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS interest margin, or NIM, on an FTE basis (non-GAAP) increased 54 basis points to 3.76 percent compared to 3.22 percent in 2021. The increases in net interest income and NIM on an FTE basis (non-GAAP) were primarily due to higher interest rates during 2022. NIM is reconciled to net interest margin adjusted to an FTE basis (non-GAAP) above in the "Explanation of Use of Non-GAAP Financial Measures" section of this MD&A. The provision for credit losses decreased $7.8 million to $8.4 million for 2022 compared to $16.2 million for 2021. The decrease in the provision for credit losses during 2022 was mainly due to a reduction in net charge-offs in 2022. Net loan charge-offs were $2.6 million, or 0.04 percent of average loans, in 2022 compared to $34.5 million, or 0.49 percent of average loans, in 2021. Noninterest income decreased $6.4 million to $58.3 million compared to $64.7 million in 2021. Mortgage banking decreased $7.5 million due to a decline in loan sale activity caused by rising interest rates and a shift to holding originated mortgage loans. Other noninterest income decreased $1.8 million primarily related to a $3.1 million decline in the fair value of assets in a nonqualified benefit plan partially offset by a net gain on the sale of OREO. Service charges on deposit accounts and debit and credit card fees increased $2.8 million due to increased customer activity. Noninterest expense increased $7.8 million to $196.7 million compared to $188.9 million in 2021. Salaries and employee benefits increased $3.0 million primarily due to base rate increases and higher incentives. Professional and legal increased $2.0 million due to increased consulting engagements compared to 2021. Marketing increased $1.0 million due to increased marketing efforts. Other noninterest expense increased $1.8 million in 2022 primarily due to a lease impairment and increased travel and entertainment expenses. These higher expenses were offset by decreases in FDIC insurance of $1.4 million in 2022 compared to 2021. The efficiency ratio (non-GAAP) for 2022 improved to 52.34 percent compared to 55.06 percent for 2021. A reconciliation of the efficiency ratio (non-GAAP) is provided above in the "Explanation of Use of Non-GAAP Financial Measures" section of this MD&A. The provision for income taxes increased $8.1 million to $33.4 million in 2022 compared to $25.3 million in 2021. The increase in our income tax provision was primarily due to a $33.3 million increase in pretax income in 2022 compared to 2021. The effective tax rate increased 1.1 percent to 19.8 percent in 2022 compared to 18.7 percent in 2021. The increase in the effective tax rate was primarily due to significantly higher income before taxes in 2022 compared to 2021. Net Interest Income Our principal source of revenue is net interest income. Net interest income represents the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the average balance of interest-earning assets and interest-bearing liabilities and changes in interest rates and spreads. The level and mix of interest-earning assets and interest-bearing liabilities is managed by our Asset and Liability Committee, or ALCO, in order to mitigate interest rate and liquidity risks of the balance sheet. A variety of ALCO strategies were implemented, within prescribed ALCO risk parameters, to produce what we believe is an acceptable level of net interest income. As part of our interest rate risk management strategy, we use interest rate swaps to add stability to net interest income by managing our exposure to interest rate movements. During 2022, we entered into interest rate swaps with a total notional amount of $500.0 million with original maturities ranging from three to five years. Our strategy is to reduce our exposure to variability in expected future cash flows related to interest payments on commercial loans that are currently indexed to the 1-month LIBOR rate. Interest rates have increased substantially in 2022 resulting in a loss on the cash flow hedges of $16.8 million which is reported in Other Comprehensive Income (Loss), or OCI, net of applicable taxes. Average Balance Sheet and Net Interest Income Analysis The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the years ended December 31: 30 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2022 2021 2020 (dollars in thousands) Average Balance Interest Rate Average Balance Interest Rate Average Balance Interest Rate ASSETS Interest-bearing deposits with banks $ 378,323 $ 2,952 0.78 % $ 722,057 $ 973 0.13 % $ 179,887 $ 515 0.29 % Securities at fair value (2)(3) 1,017,471 22,880 2.25 % 832,304 18,135 2.18 % 764,311 19,011 2.49 % Loans held for sale 1,115 49 4.38 % 4,094 124 3.03 % 5,105 160 3.13 % Commercial real estate 3,182,821 139,575 4.39 % 3,249,559 119,594 3.68 % 3,347,234 140,288 4.19 % Commercial and industrial 1,706,861 83,568 4.90 % 1,829,563 75,860 4.15 % 2,018,318 77,752 3.85 % Commercial construction 401,780 18,795 4.68 % 471,286 15,443 3.28 % 442,088 16,702 3.78 % Total commercial loans 5,291,462 241,938 4.57 % 5,550,407 210,897 3.80 % 5,807,640 234,742 4.04 % Residential mortgage 980,134 40,146 4.10 % 881,494 36,211 4.11 % 964,740 40,998 4.25 % Home equity 611,134 25,887 4.24 % 543,777 18,822 3.46 % 539,461 21,469 3.98 % Installment and other consumer 119,703 7,177 6.00 % 90,129 5,351 5.94 % 80,032 5,248 6.56 % Consumer construction 33,922 1,198 3.53 % 14,748 668 4.53 % 13,484 594 4.40 % Total consumer loans 1,744,893 74,408 4.26 % 1,530,148 61,052 3.99 % 1,597,717 68,309 4.28 % Total portfolio loans 7,036,355 316,346 4.50 % 7,080,555 271,949 3.84 % 7,405,357 303,051 4.09 % Total Loans (1)(2) 7,037,470 316,395 4.50 % 7,084,649 272,073 3.84 % 7,410,462 303,211 4.09 % Total other earning assets 12,694 577 4.54 % 10,363 397 3.83 % 18,234 929 5.10 % Total Interest-earning Assets 8,445,958 342,804 4.06 % 8,649,372 291,578 3.37 % 8,372,894 323,666 3.87 % Noninterest-earning assets 721,080 726,478 779,853 Total Assets $ 9,167,038 $ 9,375,850 $ 9,152,747 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand $ 918,222 $ 1,025 0.11 % $ 956,211 $ 809 0.08 % $ 961,823 $ 2,681 0.28 % Money market 1,909,208 11,948 0.63 % 2,033,631 3,651 0.18 % 2,040,116 11,645 0.57 % Savings 1,121,818 1,121 0.10 % 1,047,855 366 0.03 % 899,717 972 0.11 % Certificates of deposit 993,722 5,813 0.58 % 1,255,370 5,930 0.47 % 1,517,643 20,688 1.36 % Total Interest-bearing deposits 4,942,970 19,907 0.40 % 5,293,066 10,757 0.20 % 5,419,299 35,986 0.66 % Securities sold under repurchase agreements 35,836 36 0.10 % 69,964 79 0.11 % 57,673 169 0.29 % Short-term borrowings 40,013 1,659 4.15 % 6,301 12 0.19 % 155,753 1,434 0.92 % Long-term borrowings 19,090 411 2.15 % 22,995 458 1.99 % 47,953 1,201 2.50 % Junior subordinated debt securities 54,420 2,395 4.40 % 61,653 1,843 2.99 % 64,092 2,286 3.57 % Total borrowings 149,359 4,501 3.01 % 160,913 2,392 1.49 % 325,471 5,090 1.56 % Total other costing liabilities 15,163 560 3.69 % — — — % — — — % Total Interest-bearing Liabilities 5,107,492 24,968 0.49 % 5,453,979 13,150 0.24 % 5,744,770 41,076 0.72 % Noninterest-bearing liabilities 2,877,758 2,735,710 2,238,488 Shareholders’ equity 1,181,788 1,186,161 1,169,489 Total Liabilities and Shareholders’ Equity $ 9,167,038 $ 9,375,850 $ 9,152,747 Net Interest Income (2)(3) $ 317,836 $ 278,428 $ 282,590 Net Interest Margin (2)(3) 3.76 % 3.22 % 3.38 % (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 . (3) Taxable investment income is adjusted for the dividend-received deduction for equity securities. 31 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: 2022 Compared to 2021 Increase (Decrease) Due to 2021 Compared to 2020 Increase (Decrease) Due to (dollars in thousands) Volume (4) Rate (4) Net Volume (4) Rate (4) Net Interest earned on: Interest-bearing deposits with banks $ (463) $ 2,443 $ 1,980 $ 1,552 $ (1,095) $ 457 Securities at fair value (2)(3) 4,035 710 4,745 1,691 (2,566) (875) Loans held for sale (90) 15 (75) (32) (4) (36) Commercial real estate (2,456) 22,437 19,981 (4,094) (16,601) (20,695) Commercial and industrial (5,088) 12,796 7,708 (7,271) 5,380 (1,892) Commercial construction (2,278) 5,630 3,352 1,103 (2,362) (1,259) Total commercial loans (9,822) 40,863 31,041 (10,262) (13,584) (23,846) Residential mortgage 4,052 (117) 3,935 (3,538) (1,249) (4,787) Home equity 2,332 4,733 7,065 172 (2,819) (2,647) Installment and other consumer 1,756 70 1,826 662 (559) 103 Consumer construction 868 (338) 530 56 19 74 Total consumer loans 9,008 4,348 13,356 (2,648) (4,609) (7,257) Total portfolio loans (814) 45,211 44,397 (12,910) (18,193) (31,103) Total loans (1)(2) (904) 45,226 44,322 (12,942) (18,197) (31,139) Total other earning assets 89 90 179 (401) (131) (533) Change in Interest Earned on Interest-earning Assets $ 2,757 $ 48,469 $ 51,226 $ (10,100) $ (21,989) $ (32,089) Interest paid on: Interest-bearing demand $ (32) $ 248 $ 216 $ (16) $ (1,857) $ (1,872) Money market (224) 8,520 8,296 (37) (7,957) (7,994) Savings 26 728 754 160 (765) (605) Certificates of deposit (1,236) 1,119 (117) (3,575) (11,182) (14,757) Total interest-bearing deposits (1,466) 10,615 9,149 (3,468) (21,761) (25,229) Securities sold under repurchase agreements (38) (5) (43) 36 (126) (90) Short-term borrowings 65 1,582 1,647 (1,376) (46) (1,422) Long-term borrowings (78) 31 (47) (625) (118) (743) Junior subordinated debt securities (216) 768 552 (87) (356) (443) Total borrowings (267) 2,376 2,109 (2,052) (645) (2,697) Total other costing liabilities $ 560 $ — $ 560 $ — $ — $ — Change in Interest Paid on Interest-bearing Liabilities $ (1,173) $ 12,991 $ 11,818 $ (5,520) $ (22,406) $ (27,926) Change in Net Interest Income $ 3,930 $ 35,478 $ 39,408 $ (4,580) $ 417 $ (4,163) (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. (3) Taxable investment income is adjusted for the dividend-received deduction for equity securities. (4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. Net interest income on an FTE basis (non-GAAP) increased $39.4 million, or 14.2 percent, compared to 2021. The net interest margin, or NIM, on an FTE basis (non-GAAP) increased 54 basis points to 3.76 percent compared to 3.22 percent in 2021. The increases in net interest income and NIM on an FTE basis (non-GAAP) were primarily due to higher interest rates during 2022. NIM on an FTE basis (non-GAAP) was also positively impacted by lower average cash balances. Average interest-bearing deposits with banks decreased $343.7 million compared to 2021. Interest income on an FTE basis (non-GAAP) increased $51.2 million compared to 2021. The increase in interest income was primarily due to higher interest rates partially offset by lower Paycheck Protection Program, or PPP, income. Average PPP loans decreased $301.7 million compared to 2021. Average loan balances, excluding PPP loans, increased $254.5 million compared to 2021. The average yield on loans increased 66 basis points compared to 2021 due to higher interest rates. Average securities increased $185.2 million compared to 2021 due to interest-bearing deposits with banks being redeployed to higher yielding assets. Average interest-bearing deposits with banks decreased $343.7 million compared to 2021 due to decreased deposit balances and increased securities. Overall, the FTE rate (non-GAAP) on interest-earning assets increased 69 basis points compared to 2021. 32 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense increased $11.8 million compared to 2021. The increase in interest expense was primarily due to higher interest rates. Average interest-bearing deposits decreased $350.1 million compared to 2021 due to the competitive market driven by rising interest rates. The average rate paid on interest-bearing deposits increased 20 basis points due to increased interest rates. Average demand deposits increased $111.1 million compared to 2021; however, overall deposit balances were down year-over-year. Average borrowings decreased $11.6 million compared to 2021 primarily due to the discontinuation of the customer repurchase agreement product and the payoff of a subordinated debt. Short-term borrowings increased $33.7 million and the average rate paid increased 396 basis points. Overall, the cost of interest-bearing liabilities increased 25 basis points compared to 2021. Provision for Credit Losses The provision for credit losses includes a provision for losses on loans and on unfunded loan commitments. The provision for credit losses fluctuates based on changes in loan balances, risk ratings, net loan charge-offs and our CECL assumptions. The provision for credit losses decreased $7.8 million to $8.4 million for 2022 compared to $16.2 million for 2021. The provision for credit losses included $3.0 million for the reserve for unfunded commitments for 2022 compared to $0.7 million for 2021. The decrease in the provision for credit losses was primarily due to significantly lower net charge-offs in 2022 compared to 2021. Net loan charge-offs were $2.6 million in 2022 compared to $34.5 million in 2021. Contributing to the decrease in the provision for credit losses was a $1.7 million reduction in specific reserves on loans individually assessed due to the resolution of a C&I relationship through a note sale which resulted in a $5.5 million charge-off during the second quarter of 2022. Offsetting the decrease in provision for credit losses during 2022 was a $2.3 million increase in the provision for unfunded loan commitments primarily due to an increase in loss rates and unused commitments in the construction portfolio. Refer to the Credit Quality section of this MD&A for further details. Noninterest Income Years Ended December 31, (dollars in thousands) 2022 2021 $ Change % Change Securities gains, net $ 198 $ 29 $ 169 582.8 % Debit and credit card 19,008 17,952 1,056 5.9 % Service charges on deposit accounts 16,829 15,040 1,789 11.9 % Wealth management 12,717 12,889 (172) (1.3) % Mortgage banking 2,215 9,734 (7,519) (77.2) % Other 7,292 9,052 (1,760) (19.4) % Total Noninterest Income $ 58,259 $ 64,696 $ (6,437) (9.9) % Noninterest income decreased $6.4 million to $58.3 million compared to $64.7 million in 2021. Mortgage banking decreased $7.5 million due to a decline in loan sale activity caused by rising interest rates and a shift to holding originated mortgage loans. Other noninterest income decreased $1.8 million primarily related to a $3.1 million decline in the fair value of assets in a nonqualified benefit plan, which has a corresponding offset in salaries and benefits resulting in no impact to net income, partially offset by a net gain on the sale of OREO. Service charges on deposit accounts increased $1.8 million and debit and credit card fees increased $1.1 million due to increased customer activity. 33 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest Expense Years Ended December 31, (dollars in thousands) 2022 2021 $ Change % Change Salaries and employee benefits $ 103,221 $ 100,214 $ 3,007 3.0 % Data processing and information technology 16,918 16,681 237 1.4 % Occupancy 14,812 14,544 268 1.8 % Furniture, equipment and software 11,606 10,684 922 8.6 % Professional services and legal 8,318 6,368 1,950 30.6 % Other taxes 6,620 6,644 (24) (0.4) % FDIC insurance 2,854 4,224 (1,370) (32.4) % Marketing 5,600 4,553 1,047 23.0 % Other 26,797 25,013 1,784 7.1 % Total Other Noninterest Expense $ 196,746 $ 188,925 $ 7,821 4.1 % Noninterest expense increased $7.8 million to $196.7 million compared to $188.9 million in 2021. Salaries and employee benefits increased $3.0 million during 2022 primarily due to base rate increases and higher incentives offset by a change in the fair value of assets in a nonqualified benefit plan. Professional services and legal increased $2.0 million due to higher consulting expense compared to 2021. Marketing expense increased $1.0 million due to increased marketing efforts and timing of various promotions. Other noninterest expense increased $1.8 million primarily due to a lease impairment and increased travel and entertainment expenses. FDIC insurance expense decreased $1.4 million due to a lower assessment base and improvements in the components used to determine the assessment. Income Taxes The provision for income taxes increased to $33.4 million in 2022 compared to $25.3 million for 2021. The increase in our income tax provision was primarily due to a $33.3 million increase in income before taxes in 2022 compared to 2021. The effective tax rate, which is total tax expense as a percentage of income before taxes, increased to 19.8 percent in 2022 compared to 18.7 percent in 2021. The increase in the effective tax rate was primarily due to significantly higher income before taxes in 2022 compared to 2021. 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 Year Ended December 31, 2021 COVID-19 Pandemic Update On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program, or PPP, a $349 billion program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. The 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. 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. These loans carry a fixed rate of 1.00 percent and a term of two years, or five years for loans approved by the SBA, on or after June 5, 2020. Payments are deferred for at least six months of the loan. The loans are 100 percent guaranteed by the SBA. We increased our ACL in 2021 to be responsive to the additional risk related to the COVID-19 pandemic. 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. 34 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 and 2021 totaling $81.6 million. No loans remain on deferral at December 31, 2021. None of these were designated troubled debt restructurings, or TDRs, for accounting purposes. Earnings Summary 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 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) above in the "Explanation of Use of Non-GAAP Financial Measures" section of this MD&A. The provision for credit losses was $16.2 million for 2021 compared to $131.4 million in 2020. 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. A reconciliation of the efficiency ratio (non-GAAP) is provided above in the "Explanation of Use of Non-GAAP Financial Measures" section of this MD&A. 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. 35 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Interest Income The interest income on interest-earning assets and the net interest margin are presented on an FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities 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. Interest and dividend income per the Consolidated Statements of Net Income is reconciled to interest income, net interest income and net interest margin on an FTE basis (non-GAAP) above in the "Explanation of Use of Non-GAAP Financial Measures" section of this MD&A. 36 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average Balance Sheet and Net Interest Income Analysis The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the years ended December 31: 2021 2020 2019 (dollars in thousands) Average Balance Interest Rate Average Balance Interest Rate Average Balance Interest Rate ASSETS Interest-bearing deposits with banks $ 722,057 $ 973 0.13 % $ 179,887 $ 515 0.29 % $ 59,941 $ 1,233 2.06 % Securities at fair value (2)(3) 832,304 18,135 2.18 % 764,311 19,011 2.49 % 678,069 17,876 2.64 % Loans held for sale 4,094 124 3.03 % 5,105 160 3.13 % 2,169 84 3.88 % Commercial real estate 3,249,559 119,594 3.68 % 3,347,234 140,288 4.19 % 2,945,278 144,877 4.92 % Commercial and industrial 1,829,563 75,860 4.15 % 2,018,318 77,752 3.85 % 1,575,485 79,429 5.04 % Commercial construction 471,286 15,443 3.28 % 442,088 16,702 3.78 % 278,665 14,237 5.11 % Total commercial loans 5,550,407 210,897 3.80 % 5,807,640 234,742 4.04 % 4,799,428 238,543 4.97 % Residential mortgage 881,494 36,211 4.11 % 964,740 40,998 4.25 % 765,604 33,889 4.43 % Home equity 543,777 18,822 3.46 % 539,461 21,469 3.98 % 475,149 25,208 5.31 % Installment and other consumer 90,129 5,351 5.94 % 80,032 5,248 6.56 % 72,283 5,173 7.16 % Consumer construction 14,748 668 4.53 % 13,484 594 4.40 % 10,896 593 5.44 % Total consumer loans 1,530,148 61,052 3.99 % 1,597,717 68,309 4.28 % 1,323,932 64,863 4.90 % Total portfolio loans 7,080,555 271,949 3.84 % 7,405,357 303,051 4.09 % 6,123,360 303,406 4.95 % Total Loans (1)(2) 7,084,649 272,073 3.84 % 7,410,462 303,211 4.09 % 6,125,529 303,490 4.95 % Federal Home Loan Bank and other restricted stock 10,363 397 3.83 % 18,234 929 5.10 % 21,833 1,642 7.52 % Total Interest-earning Assets 8,649,372 291,578 3.37 % 8,372,894 323,666 3.87 % 6,885,372 324,241 4.71 % Noninterest-earning assets 726,478 779,853 550,164 Total Assets $ 9,375,850 $ 9,152,747 $ 7,435,536 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand $ 956,211 $ 809 0.08 % $ 961,823 $ 2,681 0.28 % $ 641,403 $ 3,915 0.61 % Money market 2,033,631 3,651 0.18 % 2,040,116 11,645 0.57 % 1,691,910 30,236 1.79 % Savings 1,047,855 366 0.03 % 899,717 972 0.11 % 766,142 1,928 0.25 % Certificates of deposit 1,255,370 5,930 0.47 % 1,517,643 20,688 1.36 % 1,396,706 26,947 1.93 % Total Interest-bearing deposits 5,293,066 10,757 0.20 % 5,419,299 35,986 0.66 % 4,496,161 63,026 1.40 % Securities sold under repurchase agreements 69,964 79 0.11 % 57,673 169 0.29 % 16,863 110 0.65 % Short-term borrowings 6,301 12 0.19 % 155,753 1,434 0.92 % 255,264 6,416 2.51 % Long-term borrowings 22,995 458 1.99 % 47,953 1,201 2.50 % 66,392 1,831 2.76 % Junior subordinated debt securities 61,653 1,843 2.99 % 64,092 2,286 3.57 % 47,934 2,310 4.82 % Total borrowings 160,913 2,392 1.49 % 325,471 5,090 1.56 % 386,453 10,667 2.76 % Total Interest-bearing Liabilities 5,453,979 13,150 0.24 % 5,744,770 41,076 0.72 % 4,882,614 73,693 1.51 % Noninterest-bearing liabilities 2,735,710 2,238,488 1,569,014 Shareholders’ equity 1,186,161 1,169,489 983,908 Total Liabilities and Shareholders’ Equity $ 9,375,850 $ 9,152,747 $ 7,435,536 Net Interest Income (2)(3) $ 278,428 $ 282,590 $ 250,548 Net Interest Margin (2)(3) 3.22 % 3.38 % 3.64 % (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 . (3) Taxable investment income is adjusted for the dividend-received deduction for equity securities. 37 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: 2021 Compared to 2020 Increase (Decrease) Due to 2020 Compared to 2019 Increase (Decrease) Due to (dollars in thousands) Volume (4) Rate (4) Net Volume (4) Rate (4) Net Interest earned on: Interest-bearing deposits with banks $ 1,552 $ (1,095) $ 457 $ 2,467 $ (3,185) $ (718) Securities at fair value (2)(3) 1,691 (2,566) (875) 2,274 (1,139) 1,135 Loans held for sale (32) (4) (36) 114 (38) 76 Commercial real estate (4,094) (16,601) (20,695) 19,772 (24,361) (4,589) Commercial and industrial (7,271) 5,380 (1,892) 22,326 (24,003) (1,677) Commercial construction 1,103 (2,362) (1,259) 8,349 (5,884) 2,465 Total commercial loans (10,262) (13,584) (23,846) 50,447 (54,248) (3,801) Residential mortgage (3,538) (1,249) (4,787) 8,815 (1,706) 7,109 Home equity 172 (2,819) (2,647) 3,412 (7,151) (3,739) Installment and other consumer 662 (559) 103 555 (480) 75 Consumer construction 56 19 74 141 (140) 1 Total consumer loans (2,648) (4,609) (7,257) 12,923 (9,477) 3,446 Total portfolio loans (12,910) (18,193) (31,103) 63,370 (63,725) (355) Total loans (1)(2) (12,942) (18,197) (31,139) 63,484 (63,763) (279) Federal Home Loan Bank and other restricted stock (401) (131) (533) (271) (442) (713) Change in Interest Earned on Interest-earning Assets $ (10,100) $ (21,989) $ (32,089) $ 67,954 $ (68,529) $ (575) Interest paid on: Interest-bearing demand $ (16) $ (1,857) $ (1,872) $ 1,956 $ (3,190) $ (1,234) Money market (37) (7,957) (7,994) 6,223 (24,814) (18,591) Savings 160 (765) (605) 336 (1,292) (956) Certificates of deposit (3,575) (11,182) (14,757) 2,333 (8,592) (6,259) Total interest-bearing deposits (3,468) (21,761) (25,229) 10,848 (37,888) (27,040) Securities sold under repurchase agreements 36 (126) (90) 266 (207) 59 Short-term borrowings (1,376) (46) (1,422) (2,501) (2,481) (4,982) Long-term borrowings (625) (118) (743) (509) (121) (630) Junior subordinated debt securities (87) (356) (443) 779 (803) (24) Total borrowings (2,052) (645) (2,697) (1,965) (3,612) (5,577) Change in Interest Paid on Interest-bearing Liabilities $ (5,520) $ (22,406) $ (27,926) $ 8,883 $ (41,500) $ (32,617) Change in Net Interest Income $ (4,580) $ 417 $ (4,163) $ 59,071 $ (27,029) $ 32,042 (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. (3) Taxable investment income is adjusted for the dividend-received deduction for equity securities. (4) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. 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 $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. 38 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense decreased $27.9 million compared to 2020. The decrease was primarily 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. Provision for Credit Losses 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 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. 39 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest Income Years Ended December 31, (dollars in thousands) 2021 2020 $ Change % Change 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 % 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 % Noninterest income increased $4.9 million, or 8.2 percent, in 2021 compared to 2020. 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. Noninterest Expense Years Ended December 31, (dollars in thousands) 2021 2020 $ Change % Change Salaries and employee benefits $ 100,214 $ 90,115 $ 10,099 11.2 % Data processing and information technology 16,681 15,499 1,182 7.6 % Occupancy 14,544 14,529 15 0.1 % Furniture, equipment and software 10,684 11,050 (366) (3.3) % 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) % 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 % NM - percentage not meaningful Noninterest expense increased $2.2 million, or 1.2 percent, to $188.8 million in 2021 compared to 2020. 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. 40 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income Taxes 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. Financial Condition December 31, 2022 Total assets decreased $378.0 million to $9.1 billion at December 31, 2022 compared to $9.5 billion at December 31, 2021. Cash and due from banks decreased $712.2 million to $210.0 million at December 31, 2022 compared to $922.2 million at December 31, 2021 primarily related to decreases in deposits due to competition driven by rising interest rates. Total portfolio loans increased $184.0 million, or 2.6 percent, to $7.2 billion at December 31, 2022 compared to $7.0 billion at December 31, 2021. The increase in portfolio loans is primarily related to an increase in the consumer loan portfolio of $344.0 million due to $327.1 million of growth in consumer real estate. The consumer loan portfolio increase was offset by decreases in commercial loans. Commercial loans decreased $160.1 million with decreases of commercial real estate loans of $108.5 million, C&I loans of $10.0 million, which included a decrease of $84.3 million of loans from the PPP, and a decrease of $41.6 million in commercial construction compared to December 31, 2021. Excluding the PPP loans, portfolio loans increased $268.3 million compared to December 31, 2021 due a modest increase in activity. Securities increased $92.0 million to $1.0 billion at December 31, 2022 from $910.8 million at December 31, 2021. The increase in securities was primarily due to interest-bearing deposits with banks being redeployed to higher yielding assets earlier in 2022. The bond portfolio had an unrealized loss of $102.3 million at December 31, 2022 compared to an unrealized gain of $9.4 million at December 31, 2021 due to higher interest rates. Our deposits decreased $776.6 million, with total deposits of $7.2 billion at December 31, 2022 compared to $8.0 billion at December 31, 2021. Customer deposits decreased $771.6 million from December 31, 2021. The decrease in customer deposits was driven by competition related to rising interest rates. Customer noninterest-bearing demand deposits decreased $159.9 million, interest-bearing demand decreased $132.5 million, money market deposits decreased $339.1 million and certificates of deposits decreased $148.5 million offset by an increase in savings of $8.4 million. Total borrowings increased $277.9 million to $439.2 million at December 31, 2022 compared to $161.3 million at December 31, 2021 due to a decrease in funding provided by customer deposits. The increase in borrowings consisted of increases in short-term borrowings of $370.0 million offset by decreases in long term borrowings of $7.7 million and a decrease of $84.5 million due to the discontinuation of securities sold under repurchase agreements. Total shareholders’ equity decreased $21.8 million to $1.2 billion at December 31, 2022 compared to $1.2 billion at December 31, 2021. The decrease was primarily due to other comprehensive losses of $105.0 million and dividends paid of $47.0 million offset by net income of $135.5 million. Other comprehensive losses were mainly due to unrealized losses of $87.9 million, net of tax, on our available-for-sale debt securities and $16.8 million, net of tax, on interest rate swaps due to the rising interest rate environment. 41 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Securities Activity The balances and average rates of our securities portfolio are presented below as of December 31: 2022 2021 2020 (dollars in thousands) Balance Weighted-Average Yield Balance Weighted-Average Yield Balance Weighted-Average Yield U.S. Treasury securities $ 131,695 1.71 % $ 95,327 1.26 % $ 10,282 1.87 % Obligations of U.S. government corporations and agencies 41,811 2.32 % 70,348 2.29 % 82,904 2.28 % Collateralized mortgage obligations of U.S. government corporations and agencies 428,407 2.56 % 270,294 1.97 % 209,296 2.23 % Residential mortgage-backed securities of U.S. government corporations and agencies 41,587 1.86 % 56,793 1.57 % 67,778 1.26 % Commercial mortgage-backed securities of U.S. government corporations and agencies 327,313 2.28 % 341,300 2.09 % 273,681 2.41 % Corporate securities 500 7.67 % 500 3.22 % 2,025 3.90 % Obligations of states and political subdivisions (1) 30,471 3.35 % 75,089 3.28 % 124,427 3.49 % Marketable equity securities 994 3.32 % 1,142 2.93 % 3,300 2.90 % Total Securities $ 1,002,778 2.34 % $ 910,793 2.05 % $ 773,693 2.42 % (1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent for 2022, 2021 and 2020. We invest in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income, and as a tool of ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to an investment policy approved annually by our Board of Directors and administered through ALCO and our treasury function. Securities increased $92.0 million to $1.0 billion at December 31, 2022 from $910.8 million at December 31, 2021. The increase in securities is primarily due to increased investing activities due to excess liquidity earlier in 2022. These increases were partially offset by unrealized losses due to a rising interest rate environment. At December 31, 2022 our bond portfolio was in a net unrealized loss position of $102.3 million compared to a net unrealized gain position of $9.4 million at December 31, 2021. At December 31, 2022, total gross unrealized gains in the bond portfolio were $0.3 million offset by gross unrealized losses of $102.6 million compared to December 31, 2021, when total gross unrealized gains were $15.2 million offset by gross unrealized losses of $5.8 million. The decrease in the net unrealized gain position was primarily due to an increase in interest rates from December 31, 2021 to December 31, 2022. Management evaluates the securities portfolio to determine if an ACL is needed each quarter. We did not record an ACL related to the securities portfolio at December 31, 2022 or December 31, 2021. Management evaluates the bond portfolio for impairment on a quarterly basis. The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of these securities. All debt securities were determined to be investment grade and paying principal and interest according to the contractual terms of the security at December 31, 2022. We do not intend to sell and it is more likely than not that we will not be required to sell any of the securities in an unrealized loss position before recovery of their amortized cost. We did not recognize any impairment charges on our securities portfolio in 2022, 2021 or 2020. The performance of the debt securities markets could generate impairments in future periods requiring realized losses to be reported. 42 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the maturities of securities at December 31, 2022 and the weighted average yields of such securities. Taxable-equivalent adjustments for 2022 have been made in calculating yields on obligations of state and political subdivisions. Maturing Within One Year After One But within Five Years After Five But Within Ten Years After Ten Years No Fixed Maturity (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Available-for-Sale U.S. Treasury securities $ — — % $ 103,386 1.85 % $ 28,309 1.21 % $ — — % $ — — % Obligations of U.S. government corporations and agencies 9,767 2.43 % 32,044 2.28 % — — % — — % — — % Collateralized mortgage obligations of U.S. government corporations and agencies — — % 14,379 2.96 % 33,845 2.97 % 380,183 2.51 % — — % Residential mortgage-backed securities of U.S. government corporations and agencies 14 5.15 % 1,049 3.51 % 1,225 2.38 % 39,299 1.80 % — — % Commercial mortgage-backed securities of U.S. government corporations and agencies 37,807 2.31 % 155,117 2.38 % 134,389 2.15 % — — % — 0 Obligations of states and political subdivisions (1) — — % 2,704 3.22 % 16,529 3.48 % 11,238 3.18 % — — % Corporate bonds — — % 500 7.67 % — — % — — % — — % Marketable equity securities — — % — — % — — % — — % 994 3.32 % Total $ 47,588 $ 309,179 $ 214,297 $ 430,720 $ 994 Weighted Average Yield 2.34 % 2.24 % 2.26 % 2.46 % 3.32 % (1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent for 2022. Lending Activity The following table summarizes our loan portfolio as of December 31: 2022 2021 2020 2019 2018 (dollars in thousands) Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total Commercial Commercial real estate $ 3,128,187 43.5 % $ 3,236,653 46.2 % $ 3,244,974 44.9 % $ 3,416,518 47.9 % $ 2,921,832 49.1 % Commercial and industrial 1,718,976 23.9 % 1,728,969 24.7 % 1,954,453 27.0 % 1,720,833 24.1 % 1,493,416 25.1 % Commercial construction 399,371 5.6 % 440,962 6.3 % 474,280 6.6 % 375,445 5.3 % 257,197 4.3 % Total Commercial Loans 5,246,534 73.0 % 5,406,584 77.2 % 5,673,706 78.5 % 5,512,796 77.2 % 4,672,445 78.6 % Consumer Residential mortgage 1,116,528 15.5 % 899,956 12.9 % 918,398 12.7 % 998,585 14.0 % 726,679 12.2 % Home equity 652,066 9.1 % 564,219 8.1 % 535,165 7.4 % 538,348 7.5 % 471,562 7.9 % Installment and other consumer 124,896 1.7 % 107,928 1.5 % 80,915 1.1 % 79,033 1.1 % 67,546 1.1 % Consumer construction 43,945 0.6 % 21,303 0.3 % 17,675 0.2 % 8,390 0.1 % 8,416 0.1 % Total Consumer Loans 1,937,435 27.0 % 1,593,406 22.8 % 1,552,153 21.5 % 1,624,356 22.8 % 1,274,203 21.4 % Total Portfolio Loans $ 7,183,969 100.0 % $ 6,999,990 100.0 % $ 7,225,859 100.0 % $ 7,137,152 100.0 % $ 5,946,648 100.0 % The loan portfolio represents the most significant source of interest income for us. The risk that borrowers will be unable to pay such obligations is inherent in the loan portfolio. Other conditions such as downturns in the borrower’s industry or the overall economic climate can significantly impact the borrower’s ability to pay. We maintain a General Lending Policy to control the quality of our loan portfolio. The policy delegates the authority to extend loans under specific guidelines and underwriting standards. The General Lending Policy is formulated by management and reviewed and ratified annually by the Board of Directors. We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we assess the credit risk within those segments to determine if additional reserve is needed in the qualitative portion of the ACL. Total commercial loans 43 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS represented 73.0 percent of total portfolio loans at December 31, 2022 compared to 77.2 percent at December 31, 2021. Within our commercial portfolio, the CRE and commercial construction portfolios combined comprised $3.5 billion, or 67.2 percent, of total commercial loans and 49.1 percent of total portfolio loans at December 31, 2022 compared to $3.7 billion, or 68.0 percent, of total commercial loans and 52.5 percent of total portfolio loans at December 31, 2021. We lend primarily in Pennsylvania and the contiguous states of Ohio, New York, West Virginia and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in these states resulting in a geographic concentration. We believe our knowledge of these markets outweighs the geographic concentration risk. Our operating knowledge at the local and regional level is derived from our front-line connection to the customer and our understanding of their businesses. We also have a portfolio management group that utilizes multiple data sources including customer information, publicly available data and subscription service data to assess risk on an on-going basis and strong overall risk management practices which help us understand and evaluate concentration risk. Our CRE and commercial construction portfolios have exposure outside this geography of 5.8 percent of the combined portfolios and 2.9 percent of total portfolio loans at December 31, 2022. This compares to 5.7 percent of the combined portfolios and 3.0 percent of total portfolio loans at December 31, 2021. Total portfolio loans increased $184.0 million, or 2.6 percent, to $7.2 billion at December 31, 2022 compared to $7.0 billion at December 31, 2021. Commercial and industrial loans, or C&I, included $4.0 million of loans originated under the PPP at December 31, 2022 compared to $88.3 million at December 31, 2021. On March 27, 2020, the CARES Act was signed into law. The CARES Act included the PPP, a program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. As of December 31, 2022, 72 percent of our total loans were variable rate loans and 28 percent were fixed rate loans. Commercial loans, including CRE, C&I and commercial construction, comprised 73.0 percent of total portfolio loans at December 31, 2022 and 77.2 percent at December 31, 2021. The decrease of $160.1 million in commercial loans related to a decrease of $108.5 million in CRE, $41.6 million in commercial construction loans and $10.0 million in C&I, which included a decrease of $84.3 million of loans from the PPP compared to December 31, 2021. Excluding the PPP loans, portfolio loans increased $268.3 million compared to December 31, 2021. Our loan demand was influenced by the downturn of the macroeconomic environment during 2022, but we did see loan growth in the second half of 2022. Consumer loans represent 27.0 percent of our total portfolio loans at December 31, 2022 and 22.8 percent at December 31, 2021. Consumer loans increased $344.0 million compared to December 31, 2021 primarily due to an increase of $216.6 million in the residential real estate portfolio, $87.8 million in the home equity portfolio and $39.6 million in installment and other consumer loans. Portfolio consumer real estate loans increased in 2022 due to a shift from mortgage loans sold to loans held in the portfolio due to increased jumbo loans and the pricing of loans in the secondary market compared to December 31, 2021. The consumer loan portfolio increase was offset by decreases in commercial loans. Residential mortgage lending continues to be a focus for us. The loan to value, or LTV, policy guideline is 80 percent for residential first lien mortgages. Higher LTV loans may be approved within unique program guidelines and the appropriate private mortgage insurance coverage. We originate traditional fixed rate mortgage loans and adjustable rate or balloon mortgages with a maximum amortization term of 30 years. We may originate home equity loans with a lien position that is second to unrelated third-party lenders, but normally only to the extent that the combined LTV considering both the first and second liens does not exceed 100 percent of the fair value of the property. Combo mortgage loans consisting of a residential first mortgage and a home equity second mortgage are also available. We originate and sell loans into the secondary market, primarily to Fannie Mae. We sell these loans in order to mitigate interest-rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing of the loans. We sold $28.6 million of 1-4 family mortgages in 2022 and $288.3 million in 2021 to Fannie Mae. The volume of loans sold to Fannie Mae decreased due to a shift from mortgage loans sold to loans held in the portfolio due to increased jumbo loans and the pricing of loans in the secondary market compared to December 31, 2021. Our servicing portfolio of mortgage loans that we had originated and sold into the secondary market was $772.9 million at December 31, 2022 compared to $841.7 million at December 31, 2021. We also offer a variety of unsecured and secured consumer loan products. 44 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents the maturity of commercial and consumer loans outstanding as of December 31, 2022: Maturity (dollars in thousands) Within One Year After One But Within Five Years After Five Years through 15 years After 15 years Total Fixed interest rates $ 234,730 $ 605,087 $ 334,741 $ 9,683 $ 1,184,241 Variable interest rates 708,630 2,012,170 1,259,292 82,201 4,062,293 Total Commercial Loans $ 943,360 $ 2,617,257 $ 1,594,033 $ 91,884 $ 5,246,534 Fixed interest rates $ 63,212 $ 200,031 $ 389,268 $ 160,631 $ 813,142 Variable interest rates 41,215 169,736 510,926 402,416 1,124,293 Total Consumer Loans $ 104,427 $ 369,767 $ 900,194 $ 563,047 $ 1,937,435 Total Portfolio Loans $ 1,047,787 $ 2,987,024 $ 2,494,227 $ 654,931 $ 7,183,969 Off Balance Sheet Arrangements In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The following table sets forth our commitments and letters of credit as of the dates presented: December 31, (dollars in thousands) 2022 2021 Commitments to extend credit $ 2,713,586 $ 2,583,957 Standby letters of credit 64,356 87,335 Total $ 2,777,942 $ 2,671,292 See Note 18 Commitments and Contingencies in Part II, Item 8. Financial Statements and Supplementary Data of this Report for details on allowance for credit losses on unfunded commitments. Credit Quality On a quarterly basis, a criticized asset meeting is held to monitor all special mention and substandard loans greater than $1.5 million and all business banking special mention and substandard loans greater than $0.5 million to establish action plans for these loans. These loans typically represent the highest risk of loss to us. We monitor these loans through regular contact with the borrower, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral. Additional credit risk management practices include periodic review, at least annually, and updates of our lending policies and procedures to support sound underwriting practices and portfolio management through portfolio stress testing. We have a portfolio monitoring process in place that includes an annual review of all commercial relationships greater than $1.5 million. Business banking relationships less than $1.5 million are monitored through portfolio management software that identifies credit risk indicators. Our Credit Risk Review process serves to independently monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all corporate lending activities. The Credit Risk Review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process. 45 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nonperforming assets, or NPAs, consist of nonaccrual loans, nonaccrual TDRs and OREO. The following represents NPAs as of December 31: (dollars in thousands) 2022 2021 Nonaccrual Loans Commercial real estate $ 7,323 $ 30,924 Commercial and industrial 1,887 3,575 Commercial construction 384 384 Consumer real estate 6,295 9,476 Other consumer 269 158 Total Nonaccrual Loans 16,158 44,517 Nonaccrual Troubled Debt Restructurings Commercial real estate — 1,968 Commercial and industrial 1,087 16,235 Commercial construction — 2,087 Consumer real estate 1,798 1,484 Other consumer 9 — Total Nonaccrual Troubled Debt Restructurings 2,894 21,774 Total Nonaccrual Loans 19,052 66,291 OREO 3,065 13,313 Total Nonperforming Assets $ 22,117 $ 79,604 Nonaccrual loans as a percent of total loans 0.27 % 0.95 % Nonperforming assets as a percent of total loans plus OREO 0.31 % 1.13 % Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due. Nonperforming assets decreased $57.5 million, or 72.2 percent, resulting in a nonperforming assets to total loans plus OREO ratio of 0.31% at December 31, 2022 compared to 1.13% at December 31, 2021. Nonaccrual loans decreased $47.2 million, or 71.3 percent, to $19.1 million at December 31, 2022 compared to $66.3 million at December 31, 2021. The significant decrease in nonaccrual loans during 2022 primarily related to minimal inflow of new nonaccrual loans and the payoff of two C&I relationships totaling $14.1 million, two CRE relationships totaling $9.2 million and the return to performing status of hotel loans totaling $9.1 million. The significant decrease in OREO related to the sale of two properties during 2022. TDRs decreased $19.9 million to $11.8 million at December 31, 2022 compared to $31.7 million at December 31, 2021. Total TDRs of $11.8 million at December 31, 2022 included $8.9 million, or 75.4 percent, that were accrual and $2.9 million, or 24.6 percent, that were nonaccrual. This is a decrease from December 31, 2021 when we had $31.7 million in TDRs, including $9.9 million, or 31.2 percent, that were accrual and $21.8 million, or 68.8 percent, that were nonaccrual. The decrease in nonaccrual TDRs during 2022 primarily related to the payoff of two C&I relationships totaling $14.1 million. Loan modifications resulting in new TDRs during 2022 included 27 modifications for $2.2 million compared to 40 modifications for $17.6 million in 2021. Included in the 2022 new TDRs were 23 loans totaling $1.4 million related to consumer bankruptcy filings that were not reaffirmed, thus resulting in discharged debt, which compares to 25 loans totaling $1.1 million in 2021. 46 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following represents delinquency as of December 31: 2022 2021 (dollars in thousands) Amount % of Loans Amount % of Loans 90 days or more: Commercial real estate $ 7,323 0.23 % $ 32,892 1.02 % Commercial and industrial 2,974 0.17 % 19,810 1.15 % Commercial construction 384 0.10 % 2,471 0.56 % Consumer real estate 8,094 0.45 % 10,960 0.74 % Other consumer 277 0.22 % 158 0.15 % Total Loans $ 19,052 0.27 % $ 66,291 0.95 % 30 to 89 days: Commercial real estate $ 8,772 0.28 % $ — — % Commercial and industrial 5,076 0.30 % 1,711 0.10 % Commercial construction — — % 502 0.11 % Consumer real estate 6,268 0.35 % 3,287 0.22 % Other consumer 225 0.18 % 256 0.24 % Loans held for sale — — % — — % Total Loans $ 20,341 0.28 % $ 5,756 0.08 % Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including early-stage delinquencies of 30 to 89 days past due for early identification of potential problem loans. Loans past due 90 days or more decreased $47.2 million compared to December 31, 2021 and represented 0.27 percent of total loans at December 31, 2022. The change in loans past due 90 days or more is explained above in nonperforming assets discussion under Credit Quality. Loans past due by 30 to 89 days increased $14.6 million and represented 0.28 percent of total loans at December 31, 2022. Allowance for Credit Losses We maintain an ACL at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of a loan that considers our historical loss experience, current conditions and forecasts of future economic conditions as of the balance sheet date. We develop and document a systematic ACL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Business Banking, 5) Consumer Real Estate and 6) Other Consumer. Our charge-off policy for commercial loans requires that loans and other obligations that are not collectible be promptly charged-off when the loss is confirmed, regardless of the delinquency status of the loan. We may elect to recognize a partial charge-off when management has determined that the value of collateral is less than the remaining investment in the loan. A loan or obligation does not need to be charged-off, regardless of delinquency status, if (i) management has determined there exists sufficient collateral to protect the remaining loan balance and (ii) there exists a strategy to liquidate the collateral. Management may also consider a number of other factors to determine when a charge-off is appropriate. These factors may include, but are not limited to: • The status of a bankruptcy proceeding; • The value of collateral and probability of successful liquidation; and/or • The status of adverse proceedings or litigation that may result in collection. Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due. Unsecured loans are fully charged off and secured loans are charged down to the estimated fair value of the collateral less the cost to sell. 47 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents activity in the ACL for each of the three years presented below: Years Ended December 31, (dollars in thousands) 2022 2021 2020 ACL Balance at Beginning of Year: $ 98,576 $ 117,612 $ 62,224 Charge-offs: Commercial real estate (1,820) (13,493) (27,512) Commercial and industrial (7,801) (22,305) (75,408) Commercial construction — (55) (454) Consumer real estate (621) (719) (1,101) Other consumer (1,375) (952) (1,890) Total (11,617) (37,524) (106,365) Recoveries: Commercial real estate 1,052 1,196 348 Commercial and industrial 7,366 822 1,733 Commercial construction 1 14 183 Consumer real estate 203 310 233 Other consumer 400 652 489 Total 9,022 2,994 2,986 Net Charge-offs (2,595) (34,530) (103,379) Impact of CECL adoption — — 27,346 Provision for credit losses 5,359 15,494 131,421 ACL Balance at End of Year: $ 101,340 $ 98,576 $ 117,612 (1) Represents ALL for year presented Net loan charge-offs for 2022 were $2.6 million, or 0.04 percent of average loans, compared to $34.5 million, or 0.49 percent of average loans for 2021. The most significant charge-off during 2022 was to a C&I relationship in the amount of $5.5 million. Offsetting loan charge-offs during 2022 were $6.6 million of loan recoveries related to two C&I relationships. The following table summarizes net charge-offs as a percentage of average loans for the years presented: 2022 2021 2020 Commercial real estate 0.02 % 0.38 % 0.81 % Commercial and industrial 0.03 % 1.17 % 3.65 % Commercial construction — % 0.01 % 0.06 % Consumer real estate 0.03 % 0.03 % 0.06 % Other consumer 0.81 % 0.33 % 1.75 % Net charge-offs to average loans outstanding 0.04 % 0.49 % 1.40 % Allowance for credit losses as a percentage of total portfolio loans 1.41 % 1.41 % 1.63 % Allowance for credit losses as a percentage of total portfolio loans excluding PPP 1.41 % 1.43 % 1.74 % Allowance for credit losses to total nonaccrual loans 532 % 149 % 80 % Provision for credit losses as a percentage of net loan charge-offs 207 % 45 % 127 % 48 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is the ACL balance by portfolio segment as of December 31: 2022 2021 (dollars in thousands) Amount % of Total Amount % of Total Commercial real estate $ 41,428 40.9 % $ 50,700 51.4 % Commercial and industrial 25,710 25.4 % 19,727 20.0 % Commercial construction 6,264 6.2 % 5,355 5.4 % Business banking 12,547 12.4 % 11,338 11.5 % Consumer real estate 12,105 11.9 % 8,733 8.9 % Other consumer 3,286 3.2 % 2,723 2.8 % Total $ 101,340 100.0 % $ 98,576 100.0 % Significant to our ACL is a higher concentration of commercial loans. The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions. Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss. The ACL was $101.3 million, or 1.41 percent of total portfolio loans, at December 31, 2022, compared to $98.6 million, or 1.41 percent of total portfolio loans, at December 31, 2021. The increase in the ACL of $2.8 million was due to a shift between the qualitative and quantitative reserves as well as loan growth. Our total qualitative reserve increased $9.3 million primarily related to a $4.0 million increase in our forecast due to concern with the overall outlook of the economy and a $5.3 million increase in other qualitative factors. Our quantitative reserve decreased $4.8 million primarily due to significant improvement in our CRE hotel portfolio, which was partially offset by deterioration in the C&I portfolio primarily related to a large relationship downgraded to substandard during the year. Specific reserves on loans individually assessed decreased $1.7 million from prior year due to the resolution of a C&I relationship through a note sale. Federal Home Loan Bank and Other Restricted Stock At December 31, 2022 and 2021, we held FHLB of Pittsburgh stock of $22.0 million and $8.5 million. This investment is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. We hold FHLB stock because we are a member of the FHLB of Pittsburgh. The FHLB requires members to purchase and hold a specified level of FHLB stock based upon on the members’ asset values, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the products and services offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the stock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. We reviewed and evaluated the FHLB capital stock for impairment at December 31, 2022. The FHLB exceeds all required capital ratios. Additionally, we considered that the FHLB has been paying dividends and actively redeeming stock throughout 2022 and 2021. Accordingly, we believe sufficient evidence exists to conclude that no impairment existed at December 31, 2022. 49 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Deposits The following table presents the composition of deposits at December 31: (dollars in thousands) 2022 2021 $ Change Customer deposits Noninterest-bearing demand $ 2,588,692 $ 2,748,586 $ (159,894) Interest-bearing demand 846,653 979,133 (132,480) Money market 1,731,521 2,070,579 (339,058) Savings 1,118,511 1,110,155 8,356 Certificates of deposit 934,593 1,083,071 (148,478) Total customer deposits 7,219,970 7,991,524 (771,554) Brokered deposits Certificates of deposit — 5,000 (5,000) Total brokered deposits — 5,000 (5,000) Total Deposits $ 7,219,970 $ 7,996,524 $ (776,554) Deposits are our primary source of funds. Our deposit base increased substantially through the pandemic related to PPP and stimulus programs, but we have experienced a decrease in deposits during 2022 related to the competitive market driven by rising interest rates. Total deposits decreased $776.6 million, or 10 percent, at December 31, 2022 compared to December 31, 2021. Total customer deposits decreased $771.6 million from December 31, 2021. Total brokered deposits decreased $5.0 million from December 31, 2021 due to a reduced need for this type of funding. Brokered deposits are an additional source of funds utilized by ALCO as a way to diversify funding sources, as well as manage our funding costs and structure. The daily average balance of deposits and rates paid on deposits are summarized in the following table for the years ended December 31: 2022 2021 2020 (dollars in thousands) Amount Rate Amount Rate Amount Rate Noninterest-bearing demand $ 2,705,210 — $ 2,594,152 — $ 2,072,310 — Interest-bearing demand 918,222 0.11 % 956,211 0.08 % 844,331 0.19 % Money market 1,909,209 0.63 % 2,026,083 0.18 % 1,960,741 0.57 % Savings 1,121,818 0.10 % 1,047,855 0.03 % 899,717 0.11 % Certificates of deposit 991,396 0.58 % 1,246,499 0.46 % 1,482,127 1.34 % Brokered deposits 2,323 2.10 % 16,419 1.15 % 232,384 1.02 % Total $ 7,648,178 0.26 % $ 7,887,218 0.14 % $ 7,491,610 0.48 % CDs of $250,000 and over accounted for 3.0 percent of total deposits at December 31, 2022 and December 31, 2021 and primarily represent deposit relationships with local customers in our market area. Maturities of CDs of $250,000 or more outstanding at December 31, 2022 are summarized as follows: (dollars in thousands) 2022 Three months or less $ 128,395 Over three through six months 31,922 Over six through twelve months 46,907 Over twelve months 11,995 Total $ 219,219 Borrowings The following table represents the composition of borrowings for the years ended December 31: (dollars in thousands) 2022 2021 $ Change Securities sold under repurchase agreements, retail $ — $ 84,491 $ (84,491) Short-term borrowings 370,000 — 370,000 Long-term borrowings 14,741 22,430 (7,689) Junior subordinated debt securities 54,453 54,393 60 Total Borrowings $ 439,194 $ 161,314 $ 277,880 50 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Borrowings are an additional source of funding for us. Total borrowings increased $277.9 million compared to December 31, 2021 due to a decrease in funding from lower deposit levels. Short-term borrowings increased $370.0 million offset by the discontinuation of the customer repurchase agreement product and the maturity of a $7.0 million long-term borrowing compared to December 31, 2021. Information pertaining to short-term borrowings is summarized in the tables below: Securities Sold Under Repurchase Agreements (dollars in thousands) 2022 2021 2020 Balance at December 31 $ — $ 84,491 $ 65,163 Average balance during the year $ 35,836 $ 69,964 $ 57,673 Average interest rate during the year 0.10 % 0.11 % 0.29 % Maximum month-end balance during the year $ 89,366 $ 84,491 $ 92,159 Average interest rate at December 31 — % 0.10 % 0.25 % Short-Term Borrowings (dollars in thousands) 2022 2021 2020 Balance at December 31 $ 370,000 $ — $ 75,000 Average balance during the year $ 40,013 $ 6,301 $ 155,753 Average interest rate during the year 4.15 % 0.19 % 0.92 % Maximum month-end balance during the year $ 370,000 $ 25,000 $ 40,240 Average interest rate at December 31 4.49 % — % 0.19 % Information pertaining to long-term borrowings is summarized in the tables below: Long-Term Borrowings (dollars in thousands) 2022 2021 2020 Balance at December 31 $ 14,741 $ 22,430 $ 23,681 Average balance during the year $ 19,090 $ 22,995 $ 47,953 Average interest rate during the year 2.15 % 1.99 % 2.50 % Maximum month-end balance during the year $ 22,344 $ 23,549 $ 50,635 Average interest rate at December 31 2.61 % 1.94 % 2.03 % Junior Subordinated Debt Securities (dollars in thousands) 2022 2021 2020 Balance at December 31 $ 54,453 $ 54,393 $ 64,083 Average balance during the year $ 54,421 $ 61,653 $ 64,092 Average interest rate during the year 4.40 % 2.99 % 3.57 % Maximum month-end balance during the year $ 54,453 $ 64,128 $ 64,848 Average interest rate at December 31 7.09 % 2.69 % 3.01 % We have completed three private placements of trust preferred securities to financial institutions. As a result, we own 100 percent of the common equity of STBA Capital Trust I, DNB Capital Trust I, and DNB Capital Trust II, or the Trusts. The Trusts were formed to issue mandatorily redeemable capital securities to third-party investors. The proceeds from the sale of the securities and the issuance of the common equity by the Trusts were invested in junior subordinated debt securities issued by us. The third-party investors are considered the primary beneficiaries of the Trusts; therefore, the Trusts qualify as variable interest entities, but are not consolidated into our financial statements. The Trusts pays dividends on the securities at the same rate as the interest paid by us on the junior subordinated debt held by the Trusts. DNB Capital Trust I and DNB Capital Trust II were acquired with the DNB Merger. Refer to Note 16 Short-Term Borrowings and Note 17 Long-Term Borrowings and Subordinated Debt to the consolidated financial statements included in Part II, Item 8. Financial Statements and Supplementary Data, of this Report, for more details. 51 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Wealth Management Assets As of December 31, 2022, the fair value of the S&T Bank Wealth Management assets under administration, which are not accounted for as part of our assets, decreased to $2.2 billion from $2.3 billion as of December 31, 2021. Assets under administration consisted of $1.0 billion in S&T Trust, $0.8 billion in S&T Financial Services and $0.4 billion in Stewart Capital Advisors. Liquidity and Capital Resources Liquidity Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. Our primary future cash needs are centered on the ability to (i) satisfy the financial needs of depositors who may want to withdraw funds or of borrowers needing to access funds to meet their credit needs and (ii) to meet our future cash commitments under contractual obligations with third parties. In order to manage liquidity risk, our Board of Directors has delegated authority to ALCO for the formulation, implementation and oversight of liquidity risk management for S&T. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position. Our primary funding and liquidity source is a stable customer deposit base. We believe S&T has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile sources. Refer to the Deposits section of this MD&A for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to S&T include borrowing availability at the Federal Home Loan Bank, or FHLB, of Pittsburgh, federal funds lines with other financial institutions, the brokered deposit market and borrowing availability through the Federal Reserve Borrower-In-Custody program. We believe that these funding sources will provide adequate resources to fund our short-term and long-term operating and financing needs. In addition, our ability to access capital markets provides additional sources of funding with respect to strategic investing opportunities. Our access to and the availability of funds in the future will be affected by many factors, including, but not limited to our financial condition and prospects, our credit rating, the liquidity of the overall capital markets and the current state of the economy. The following table summarizes our material contractual obligations as of December 31, 2022: Payments Due In (dollars in thousands) 2023 2024-2025 2026-2027 Later Years Total Certificates of deposit (1) 733,285 161,343 38,711 1,254 934,593 Short-term borrowings (1) 370,000 — — — 370,000 Long-term borrowings (1) 464 13,461 180 636 14,741 Junior subordinated debt securities (1) — — — 54,453 54,453 Operating and finance leases 5,053 9,984 9,587 60,837 85,461 Purchase obligations 32,555 62,656 53,190 — 148,401 (1) Excludes interest An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At December 31, 2022, S&T Bank had $870.0 million in highly liquid assets, which consisted of $137.6 million in interest-bearing deposits with banks and $732.4 million in unpledged securities. This resulted in a highly liquid assets to total assets ratio of 9.6 percent at December 31, 2022. Highly liquid assets have declined by $431.0 million when comparing December 31, 2022 to December 31, 2021. The majority of the decrease in liquid assets is attributed to decreases in cash balances which are primarily a result of decreased deposits. At December 31, 2022, we had remaining borrowing availability of $2.4 billion with the FHLB of Pittsburgh. Refer to Note 16 Short-Term Borrowings and Note 17 Long-Term Borrowings and Subordinated Debt to the consolidated financial statements included in Part II, Item 8. Financial Statements and Supplementary Data, and the Borrowings section of this MD&A, for more details. 52 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources Shareholders’ equity decreased $21.8 million, or 1.8 percent, to $1.2 billion at December 31, 2022 compared to $1.2 billion at December 31, 2021. The decrease was primarily due to a $105.0 million decrease in other comprehensive income and dividends of $47.0 million, partially offset by net income of $135.5 million. The decrease in other comprehensive income was primarily due to a $87.9 million increase in unrealized losses on our available-for-sale securities, net of tax and an increase of $16.8 million in unrealized losses on our interest rate swaps. We continue to maintain our capital position with a leverage ratio of 11.06 percent as compared to the regulatory guideline of 5.00 percent to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.81 percent compared to the regulatory guideline of 6.50 percent to be well-capitalized. Our risk-based Tier 1 and Total capital ratios were 13.21 percent and 14.73 percent, which places us above the federal bank regulatory agencies’ well-capitalized guidelines of 8.00 percent and 10.00 percent, respectively. Our ratios are also above the required minimum ratios after the capital conservation buffer, discussed further below, of common equity tier 1 risk-based capital ratio greater than 7.00 percent, tier 1 risk-based capital ratio greater than 8.50 percent and a total risk-based capital ratio greater than 10.50 percent. We believe that we have the ability to raise additional capital, if necessary. On March 27, 2020, the regulators issued interim final rule, or IFR, “Regulatory Capital Rule: Revised Transition of the Current Expected Credit Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The IFR provides financial institutions that adopt CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided by the initial two-year delay (“five year transition”). We adopted CECL effective January 1, 2020 and elected to implement the five year transition. In July 2013 the federal banking agencies issued a final rule to implement Basel III and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. The rule requires a banking organization to maintain a capital conservation buffer composed of common equity tier 1 capital in an amount greater than 2.50 percent of total risk-weighted assets. Banking organizations must maintain a common equity tier 1 risk-based capital ratio greater than 7.00 percent, a tier 1 risk-based capital ratio greater than 8.50 percent and a total risk-based capital ratio greater than 10.50 percent; otherwise, it will be subject to restrictions on capital distributions and discretionary bonus payments. The minimum capital requirements plus the capital conservation buffer exceeds the regulatory capital ratios required for an insured depository institution to be well-capitalized under the FDIC's prompt corrective action framework. Federal regulators periodically propose amendments to the regulatory capital rules and the related regulatory framework and consider changes to the capital standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form and effect of any such proposed amendments cannot be predicted. We have filed a shelf registration statement on Form S-3 under the Securities Act of 1933 as amended, with the SEC, which allows for the issuance of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to subsidiaries, possible acquisitions and stock repurchases. As of December 31, 2022, we had not issued any securities pursuant to the shelf registration statement. Inflation Management is aware of the significant effect inflation has on interest rates and can have on financial performance and is closely monitoring the increased inflation rates being experienced in the economy. Our ability to cope with this is best determined by analyzing our capability to respond to changing interest rates and our ability to manage noninterest income and expense. We monitor the mix of interest-rate sensitive assets and liabilities through ALCO in order to reduce the impact of inflation on net interest income. We also control the effects of inflation by reviewing the prices of our products and services, by introducing new products and services and by controlling overhead expenses. 53 Table of Contents S&T BANCORP, INC. AND SUBSIDIARIES