S&T Bancorp
Annual Report 2020

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ☒ ☐ For the transition period from to Commission file number 0-12508 S&T BANCORP, INC. (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 800 Philadelphia Street Indiana PA (Address of principal executive offices) 25-1434426 (IRS Employer Identification No.) 15701 (zip code) Registrant’s telephone number, including area code (800) 325-2265 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $2.50 per share Trading Symbol STBA Name of each exchange on which registered The NASDAQ Stock Market LLC Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒ No ☐ Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer ☒ ☐ Accelerated filer Smaller reporting company Emerging growth company ☐ ☐ ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. The aggregate estimated fair value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2020: Common Stock, $2.50 par value – 899,373,103 The number of shares outstanding of each of the registrant's classes of common stock as of February 22, 2021: Common Stock, $2.50 par value –39,293,583 DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement of S&T Bancorp, Inc., to be filed pursuant to Regulation 14A for the annual meeting of shareholders to be held May 17, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of Contents Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits, Financial Statement Schedules Signatures 3 14 24 25 26 26 27 29 33 67 69 142 143 144 145 145 145 145 145 146 149 PART I 2 Item 1. BUSINESS General S&T Bancorp, Inc. was incorporated on March 17, 1983 under the laws of the Commonwealth of Pennsylvania as a bank holding company and is registered with the Board of Governors of the Federal Reserve System, or the Federal Reserve Board, under the Bank Holding Company Act of 1956, as amended, or the BHCA, as a bank holding company and a financial holding company. S&T Bancorp, Inc. has five active direct wholly-owned subsidiaries including S&T Bank, 9th Street Holdings, Inc., STBA Capital Trust I, DNB Capital Trust I and DNB Capital Trust II, and owns a 50 percent interest in Commonwealth Trust Credit Life Insurance Company, or CTCLIC. DNB Capital Trust I and DNB Capital Trust II were acquired with the DNB merger on November 30, 2019. When used in this Report, “S&T”, “we”, “us” or “our” may refer to S&T Bancorp, Inc. individually, S&T Bancorp, Inc. and its consolidated subsidiaries or certain of S&T Bancorp, Inc.’s subsidiaries or affiliates, depending on the context. As of December 31, 2020, we had approximately $9.0 billion in assets, $7.2 billion in loans, $7.4 billion in deposits and $1.2 billion in shareholders’ equity. On November 30, 2019, pursuant to the terms and conditions of the Agreement and Plan of Merger, dated as of June 5, 2019 (the “Merger Agreement”), by and between S&T Bancorp, Inc. (“S&T”) and DNB Financial Corporation (“DNB”), DNB merged with and into S&T (the “Merger”), with S&T continuing as the surviving corporation. At the effective time of the Merger, each share of the common stock of DNB issued and outstanding was converted into the right to receive 1.22 shares of S&T common stock. The transaction was valued at $201.0 million and added total assets of $1.1 billion, including $909.0 million in loans, as well as $967.3 million in deposits. Immediately following the Merger, DNB First, National Association (“DNB First”), a wholly owned bank subsidiary of DNB, merged with and into S&T Bank, with S&T Bank as the surviving entity. DNB First was a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in the southeastern Pennsylvania market area. DNB First had three wholly-owned operating subsidiaries, Downco, Inc., DN Acquisition Company, Inc., and DNB Financial Services, Inc. Effective November 30, 2019, the DNB First subsidiaries were transferred to S&T Bank with the merger. S&T Bank is a full-service bank that operates in five markets including Western Pennsylvania, Eastern Pennsylvania, Northeast Ohio, Central Ohio and Upstate New York. S&T Bank deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the maximum extent provided by law. S&T Bank has six active wholly-owned operating subsidiaries including S&T Insurance Group, LLC, S&T Bancholdings, Inc., Stewart Capital Advisors, LLC, Downco, Inc., DN Acquisition Company, Inc., and DNB Financial Services, Inc. Effective January 1, 2018, S&T Insurance Group, LLC, sold a majority interest in its previously wholly-owned subsidiary S&T Evergreen Insurance, LLC. Through S&T Bank and our non-bank subsidiaries, we offer consumer, commercial and small business banking services, which include accepting time and demand deposits and originating commercial and consumer loans, brokerage services and trust services including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits. We also manage private investment accounts for individuals and institutions through our registered investment advisor. Total Wealth Management assets under administration were $2.1 billion at December 31, 2020. The main office of both S&T Bancorp, Inc. and S&T Bank is located at 800 Philadelphia Street, Indiana, Pennsylvania, and our phone number is (800) 325-2265. Human Capital Management As part of our mission to become the financial services provider of choice within the markets that we serve, we strive to employ talented people who are based in these communities and are dedicated to providing the best financial products and services to our customers. Our commitment to every customer starts with a talented team. To attract and retain our talented team we strive to make S&T an inclusive, safe and healthy workplace that provides our employees with opportunities to grow and develop. We consider our employees to be the bedrock of the company and instrumental in assisting our customers address the challenges facing our markets, in particular, during the COVID-19 pandemic in 2020 and beyond. As of December 31, 2020, we had approximately 1,174 full time equivalent employees. Our Team and Culture Our team strives to embody values to encourage a culture that has enabled us to be named a top workplace. The specific words or phrases that serve as the basis for our culture and values are as follows: • • • • Serve Our Customers Challenge the Status Quo Communicate Empower Employees 3 Table of Contents Item 1. BUSINESS -- continued • Work as a Team • Trust Each Other • Develop People • Reward Success • Measure Results • Support Our Communities Diversity and Inclusion S&T Bank fosters a diverse work culture where employees work together to better our company, services and community. We are committed to promoting a diverse workforce and developing all people through: • • • Equal Opportunity Employment Educating our employees Fostering a culture to address customers’ needs Talent Development and Training Our Corporate Training Department maintains oversight of all training to ensure that it is implemented and monitored properly and encourages career development for our employees. Our training program offers a blended learning approach comprised of classroom and online course delivery. In 2020, we converted to online webinars and learning management system delivery for all regulatory, compliance, skill-based, technology, leadership and career development training. In 2020, our employees logged nearly 53,000 training hours, consistent with 2019 and 2018. Safety, Health and Wellness The safety, health and wellness of our employees is a top priority. We offer our employees and their families access to a variety of flexible and convenient health and welfare programs that provide resources to help them maintain and/or improve their physical and mental health. We also have a financial wellness program that assists our employees and their families with budgeting and various personal financial content consisting of an online personal financial program and internally produced webinars. Beginning in March 2020, we aggressively developed a plan to mitigate the potential risks and impact of the COVID-19 pandemic on S&T and to promote the health and safety of our employees and the customers and communities that we serve. We have taken preventive health measures for our employees through rigorous sanitation, social distancing, wearing masks and remote working where feasible. We provided COVID-19 incentive pay to employees who were not able to work remote and funded an ongoing childcare assistance program to supplement childcare costs during this time. We also amended our defined contribution plan to allow eligible COVID-19 related withdrawals under the CARES Act. In addition, we employ extensive safety measures at our branches and encourage our customers to use our online and mobile banking solutions. Our solution center hours have been extended to allow for customer consultation without entering a branch. Much of this plan has continued into 2021. Access to United States Securities and Exchange Commission Filings All of our reports filed electronically with the United States Securities and Exchange Commission, or the SEC, including this Annual Report on Form 10-K for the fiscal year ended December 31, 2020, our prior annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and our annual proxy statements, as well as any amendments to those reports, are accessible at no cost on our website at www.stbancorp.com under Financial Information, SEC Filings. These filings are also accessible on the SEC’s website at www.sec.gov. The charters of the Audit Committee, the Compensation and Benefits Committee, the Credit Risk Committee, the Executive Committee, the Nominating and Corporate Governance Committee, the Risk Committee and the Trust and Revenue Oversight Committee, as well as the Complaints Regarding Accounting, Internal Accounting Controls or Auditing Matters ("Whistleblower Policy"), the Code of Conduct for the CEO and CFO, the General Code of Conduct, the Shareholder Communications Policy, and the Corporate Governance Guidelines are also available at www.stbancorp.com under Corporate Governance. 4 Table of Contents Item 1. BUSINESS -- continued Supervision and Regulation General S&T is extensively regulated under federal and state law. Regulation of bank holding companies and banks is intended primarily for the protection of consumers, depositors, borrowers, the Federal Deposit Insurance Fund, or DIF, and the banking system as a whole, and not for the protection of shareholders or creditors. The following describes certain aspects of that regulation and does not purport to be a complete description of all regulations that affect S&T, or all aspects of any regulation discussed here. To the extent statutory or regulatory provisions are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, enacted in July 2010, has had and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes addressing, among other things: (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; (v) enhanced corporate governance and executive compensation requirements and disclosures; and (vi) numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC. While certain requirements called for in the Dodd-Frank Act have been implemented, these regulations are subject to continuing interpretation and potential amendment, and a variety of the requirements remain to be implemented. Given the continued uncertainty associated with the ongoing implementation of the requirements of the Dodd-Frank Act by the various regulatory agencies, including the manner in which the remaining provisions will be implemented and the interpretation of and potential amendments to existing regulations, the full extent of the impact of such requirements on financial institutions’ operations is unclear. The continuing changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, increase our operating and compliance costs, or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. In addition, proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in state legislatures and before the various bank regulatory agencies that may impact S&T. Such initiatives to change the laws and regulations may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Any such legislation could change bank statutes and our operating environment in substantial and unpredictable ways. If enacted, such legislation could affect how S&T and S&T Bank operate and could significantly increase costs, impede the efficiency of internal business processes, limit our ability to pursue business opportunities in an efficient manner, or affect the competitive balance among banks, credit unions and other financial institutions, any of which could materially and adversely affect our business, financial condition and results of operations. The likelihood and timing of any changes and the impact such changes might have on S&T is impossible to determine with any certainty. S&T We are a bank holding company subject to regulation under the BHCA and the examination and reporting requirements of the Federal Reserve Board. Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than five percent of the voting shares or substantially all of the assets of any additional bank, or merge or consolidate with another bank holding company, without the prior approval of the Federal Reserve Board. As a bank holding company, we are expected under statutory and regulatory provisions to serve as a source of financial and managerial strength to our subsidiary bank. A bank holding company is also expected to commit resources, including capital and other funds, to support its subsidiary bank. 5 Table of Contents Item 1. BUSINESS -- continued We elected to become a financial holding company under the BHCA in 2001 and thereby may engage in a broader range of financial activities than are permissible for traditional bank holding companies. In order to maintain our status as a financial holding company, we must remain “well-capitalized” and “well-managed” and the depository institutions controlled by us must remain “well-capitalized,” “well-managed” (as defined in federal law) and have at least a “satisfactory” Community Reinvestment Act, or CRA, rating. Refer to Note 26 Regulatory Matters to the Consolidated Financial Statements contained in Part II, Item 8 of this Report for information concerning the current capital ratios of S&T and S&T Bank. No prior regulatory approval is required for a financial holding company with total consolidated assets less than $50 billion to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board, unless the total consolidated assets to be acquired exceed $10 billion. The BHCA identifies several activities as “financial in nature” including, among others, securities underwriting; dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and sales agency; investment advisory activities; merchant banking activities and activities that the Federal Reserve Board has determined to be closely related to banking. Banks may also engage in, subject to limitations on investment, activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is “well-capitalized,” “well- managed” and has at least a “satisfactory” CRA rating. If S&T or S&T Bank ceases to be “well-capitalized” or “well-managed,” we will not be in compliance with the requirements of the BHCA regarding financial holding companies or requirements regarding the operation of financial subsidiaries by insured banks. If a financial holding company is notified by the Federal Reserve Board of such a change in the ratings of any of its subsidiary banks, it must take certain corrective actions within specified time frames. Furthermore, if S&T Bank was to receive a CRA rating of less than “satisfactory,” then we would be prohibited from engaging in certain new activities or acquiring companies engaged in certain financial activities until the rating is raised to “satisfactory” or better. We are presently engaged in non-banking activities through the following eight entities: • • • • • th 9 Street Holdings, Inc. was formed in June 1988 to hold and manage a group of investments previously owned by S&T Bank and to give us additional latitude to purchase other investments. S&T Bancholdings, Inc. was formed in August 2002 to hold and manage a group of investments previously owned by S&T Bank and to give us additional latitude to purchase other investments. CTCLIC is a joint venture with another financial institution, and acts as a reinsurer of credit life, accident and health insurance policies that were sold by S&T Bank and the other institution. S&T Bank and the other institution each have ownership interests of 50 percent in CTCLIC. S&T Insurance Group, LLC distributes life insurance and long-term disability income insurance products. During 2001, S&T Insurance Group, LLC and Attorneys Abstract Company, Inc. entered into an agreement to form S&T Settlement Services, LLC, or STSS, with respective ownership interests of 55 percent and 45 percent. STSS is a title insurance agency servicing commercial customers. During 2002, S&T Insurance Group, LLC expanded into the property and casualty insurance business with the acquisition of S&T Evergreen Insurance, LLC. On January 1, 2018, we sold a 70 percent majority interest in the assets of our subsidiary, S&T Evergreen Insurance, LLC. We transferred our remaining 30 percent share of net assets from S&T Evergreen Insurance, LLC to a new entity for a 30 percent partnership interest in a new insurance entity. Stewart Capital Advisors, LLC was formed in August 2005 and is a registered investment advisor that manages private investment accounts for individuals and institutions. • DNB Financial Services, Inc. was acquired with the DNB First merger on November 30, 2019. DNB Financial Services, Inc. is a Pennsylvania licensed insurance agency, which, through a third-party marketing agreement with Cetera Investment Services, LLC, sells a variety of insurance and investments products. • Downco, Inc and DN Acquisition Company, Inc. were acquired with the DNB First merger on November 30, 2019. Downco, Inc. and DN Acquisition Company, Inc. were formed to acquire and hold Other Real Estate Owned acquired through foreclosure or deed in-lieu-of foreclosure, as well as Bank-occupied real estate. S&T Bank As a Pennsylvania-chartered, FDIC-insured non-member commercial bank, S&T Bank is subject to the supervision and regulation of the Pennsylvania Department of Banking and Securities, or PADBS, and the FDIC. We are also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be granted and limits on the types of other activities in which S&T Bank may engage and the investments it may make. In addition, pursuant to the federal Bank Merger Act, S&T Bank must obtain the prior approval of the FDIC before it can merge or consolidate with or acquire the assets or assume the deposit liabilities of another bank. 6 Table of Contents Item 1. BUSINESS -- continued S&T Bank is subject to affiliate transaction rules in Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board's Regulation W, that limit the amount of transactions between itself and S&T or any other company or entity that controls or is under common control with any company or entity that controls S&T Bank, including for most purposes any financial or depository institution subsidiary of S&T Bank. Under these provisions, “covered” transactions, including making loans, purchasing assets, issuing guarantees and other similar transactions, between a bank and its parent company or any other affiliate, generally are limited to 10 percent of the bank subsidiary’s capital and surplus, and with respect to all transactions with affiliates, are limited to 20 percent of the bank subsidiary’s capital and surplus. Loans and extensions of credit from a bank to an affiliate generally are required to be secured by eligible collateral in specified amounts, and in general all affiliated transactions must be on terms consistent with safe and sound banking practices. The Dodd-Frank Act expanded the affiliate transaction rules to broaden the definition of affiliate to include as covered transactions securities borrowing or lending, repurchase or reverse repurchase agreements and derivative activities, and to strengthen collateral requirements and limit Federal Reserve exemptive authority. Federal law also constrains the types and amounts of loans that S&T Bank may make to its executive officers, directors and principal shareholders. Among other things, these loans are limited in amount, must be approved by the bank’s board of directors in advance, and must be on terms and conditions as favorable to the bank as those available to an unrelated person. The Dodd-Frank Act strengthened restrictions on loans to insiders and expanded the types of transactions subject to the various limits to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction. The Dodd-Frank Act also placed restrictions on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors. Insurance of Accounts; Depositor Preference The deposits of S&T Bank are insured up to applicable limits per insured depositor by the DIF, as administered by the FDIC. The Dodd-Frank Act codified FDIC deposit insurance coverage per separately insured depositor for all account types at $250,000. As an FDIC-insured bank, S&T Bank is subject to FDIC insurance assessments, which are imposed based upon the calculated risk the institution poses to the DIF. In July 2016, the FDIC Board of Directors adopted a revised final rule to refine the deposit insurance assessment system for small insured depository institutions (less than $10 billion in assets) that have been federally insured for at least five years by: revising the financial ratios method for determining assessment rates so that it is based on a statistical model estimating the probability of failure over three years; updating the financial measures used in the financial ratios method consistent with the statistical model; and eliminating risk categories for established small banks and using the financial ratios method to determine assessment rates for all such banks. The amended FDIC insurance assessment benefits many small institutions with a lower rate; we, however, have incurred a minimal increase to our base rate due to our recent financial performance. Under the current assessment system, for an institution with less than $10 billion in assets, assessment rates are determined based on a combination of financial ratios and CAMELS composite ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly. Assessments are calculated as a percentage of average consolidated total assets less average tangible equity during the assessment period. The current total base assessment rates on an annualized basis range from 1.5 basis points for certain “well-capitalized,” “well-managed” banks, with the highest ratings, to 40 basis points for complex institutions posing the most risk to the DIF. The FDIC may raise or lower these assessment rates on a quarterly basis based on various factors designed to achieve a minimum designated reserve ratio of the DIF, which the Dodd-Frank Act has mandated to be no less than 1.35 percent of estimated insured deposits, subsequently set at two percent by the FDIC. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the Federal Reserve Board. It also may suspend deposit insurance temporarily during the hearing process if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC. Under federal law, deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by a receiver. Such priority creditors would include the FDIC. 7 Table of Contents Item 1. BUSINESS -- continued Capital The Federal Reserve Board and the FDIC have issued substantially similar minimum risk-based and leverage capital rules applicable to the banking organizations they supervise. At December 31, 2020, both S&T and S&T Bank met the applicable minimum regulatory capital requirements. The following table summarizes the leverage and risk-based capital ratios for S&T and S&T Bank: (dollars in thousands) As of December 31, 2020 Leverage Ratio S&T S&T Bank Common Equity Tier 1 (to Risk-Weighted Assets) S&T S&T Bank Tier 1 Capital (to Risk-Weighted Assets) S&T S&T Bank Total Capital (to Risk-Weighted Assets) S&T S&T Bank Actual Minimum Regulatory Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio $ 825,515 810,636 9.43 % 9.27 % $ 350,311 349,739 796,515 810,636 825,515 810,636 944,686 922,007 11.33 % 11.55 % 11.74 % 11.55 % 13.44 % 13.14 % 316,338 315,792 421,784 421,056 562,379 561,408 4.00 % 4.00 % 4.50 % 4.50 % 6.00 % 6.00 % 8.00 % 8.00 % $ 437,889 437,174 456,933 456,144 562,379 561,408 702,974 701,760 5.00 % 5.00 % 6.50 % 6.50 % 8.00 % 8.00 % 10.00 % 10.00 % In addition, the banking regulatory agencies may from time to time require that a banking organization maintain capital above the minimum prescribed levels, whether because of its financial condition or actual or anticipated growth. The risk-based capital standards establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures explicitly into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. For purposes of the risk-based ratios, assets and specified off-balance sheet instruments are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off- balance sheet items. The leverage ratio represents capital as a percentage of total average assets adjusted as specified in the guidelines. In July 2013 the federal banking agencies issued final regulatory capital rules that replaced the then existing general risk-based capital and related rules, broadly revising the basic definitions and elements of regulatory capital and making substantial changes to the risk weightings for banking and trading book assets. The new regulatory capital rules are designed to implement Basel III (which were agreements reached in July 2010 by the international oversight body of the Basel Committee on Banking Supervision to require more and higher-quality capital) as well as the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. These new capital standards apply to all banks, regardless of size, and to all bank holding companies with consolidated assets greater than $500 million and became effective on January 1, 2015. For smaller banking organizations such as S&T and S&T Bank, the rules are subject to a transition period providing for full implementation as of January 1, 2019. The required regulatory capital minimum ratios under the new capital standards as of December 31, 2020 are as follows: • • • • Common equity Tier 1 risk-based capital ratio (common equity Tier 1 capital to standardized total risk-weighted assets) of 4.50 percent; Tier 1 risk-based capital ratio (Tier 1 capital to standardized total risk-weighted assets) of 6.00 percent; Total risk-based capital ratio (total capital to standardized total risk-weighted assets) of 8.00 percent; and Leverage ratio (Tier 1 capital to average total consolidated assets less amounts deducted from Tier 1 capital) of 4.00 percent. Generally, under the guidelines, common equity Tier 1 capital consists of common stock instruments that meet the eligibility criteria in the rule, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority interest, less applicable regulatory adjustments and deductions including goodwill, intangible assets subject to limitation and certain deferred tax assets subject to limitation. Tier 1 capital is comprised of common equity Tier 1 capital plus generally non-cumulative perpetual preferred stock, Tier 1 minority interests and, for bank holding companies with less than $15 billion in consolidated assets at December 31, 2009, certain restricted capital instruments including qualifying cumulative perpetual preferred stock and grandfathered trust preferred securities, up to a limit of 25 percent of Tier 1 capital, less applicable regulatory adjustments and deductions. Tier 2, or supplementary, capital generally includes portions of trust preferred securities 8 Table of Contents Item 1. BUSINESS -- continued and cumulative perpetual preferred stock not otherwise counted in Tier 1 capital, as well as preferred stock, subordinated debt, total capital minority interests not included in Tier 1, and the allowance for credit losses, or ACL, in an amount not exceeding 1.25 percent of standardized risk-weighted assets, less applicable regulatory adjustments and deductions. Total capital is the sum of Tier 1 and Tier 2 capital. The new regulatory capital rule also 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 beginning in 2019. Beginning in 2016, the capital conservation buffer was phased in, beginning at 25 percent, increasing to 50 percent in 2017, 75 percent in 2018 and 100 percent in 2019 and beyond. As a result, starting in 2019, a banking organization 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 new rule was fully phased in during 2019 and the minimum capital requirements plus the capital conservation buffer exceed the regulatory capital ratios required for an insured depository institution to be well-capitalized under prompt corrective action law, described in "Other Safety and Soundness Regulations". The new regulatory capital rule also revises the calculation of risk-weighted assets. It includes a new framework under which the risk weight will increase for most credit exposures that are 90 days or more past due or on nonaccrual, high-volatility commercial real estate loans, mortgage servicing and deferred tax assets that are not deducted from capital and certain equity exposures. It also includes changes to the credit conversion factors of off-balance sheet items, such as the unused portion of a loan commitment. 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. Payment of Dividends S&T is a legal entity separate and distinct from its banking and other subsidiaries. A substantial portion of our revenues consist of dividend payments we receive from S&T Bank. The payment of common dividends by S&T is subject to certain requirements and limitations of Pennsylvania law. S&T Bank, in turn, is subject to federal and state laws and regulations that limit the amount of dividends it can pay to S&T. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. In connection with our reduced net income and our inability to fully fund the dividend from earnings over the prior year, due in substantial part to the customer fraud that occurred in the second quarter of 2020, we received non-objection letters from the Federal Reserve to continue to pay our dividends declared in the third and fourth quarter of 2020. Thus, under certain circumstances based upon our financial condition, our ability to declare and pay quarterly dividends may require consultation with the Federal Reserve Board and may be prohibited by applicable Federal Reserve Board guidance. 9 Table of Contents Item 1. BUSINESS -- continued Other Safety and Soundness Regulations There are a number of obligations and restrictions imposed on bank holding companies such as us and our depository institution subsidiary by federal law and regulatory policy. These obligations and restrictions are designed to reduce potential loss exposure to the FDIC’s DIF in the event an insured depository institution becomes in danger of default or is in default. Under current federal law, for example, the federal banking agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” as defined by the law. As of December 31, 2020, S&T Bank was classified as “well-capitalized.” New definitions of these categories, as set forth in the federal banking agencies’ final rule to implement Basel III and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act, became effective as of January 1, 2015. To be well-capitalized, an insured depository institution must have a common equity Tier 1 risk-based capital ratio of at least 6.50 percent, a Tier 1 risk-based capital ratio of at least 8.00 percent, a total risk-based capital ratio of at least 10.00 percent and a leverage ratio of at least 5.00 percent, and the institution must not be subject to any written agreement, order, capital directive or prompt corrective action directive by its primary federal regulator. To be adequately capitalized, an insured depository institution must have a common equity Tier 1 risk-based capital ratio of at least 4.50 percent, a Tier 1 risk-based capital ratio of at least 6.00 percent, a total risk-based capital ratio of at least 8.00 percent and a leverage ratio of at least 4.00 percent. The classification of depository institutions is primarily for the purpose of applying the federal banking agencies’ prompt corrective action provisions and is not intended to be and should not be interpreted as a representation of overall financial condition or prospects of any financial institution. The federal banking agencies’ prompt corrective action powers, which increase depending upon the degree to which an institution is undercapitalized, can include, among other things, requiring an insured depository institution to adopt a capital restoration plan, which cannot be approved unless guaranteed by the institution’s parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rates the institution may pay on deposits; restricting the institution from accepting brokered deposits; prohibiting the payment of principal or interest on subordinated debt; prohibiting the holding company from making capital distributions, including payment of dividends, without prior regulatory approval; and, ultimately, appointing a receiver for the institution. The federal banking agencies have also adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, fees and compensation and benefits. In general, the guidelines require appropriate systems and practices to identify and manage specified risks and exposures. The guidelines prohibit excessive compensation as an unsafe and unsound practice and characterize compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the agencies have adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not in compliance with any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an “undercapitalized” institution is subject under the prompt corrective action provisions described above. Regulatory Enforcement Authority The enforcement powers available to federal banking agencies are substantial and include, among other things and in addition to other powers described herein, the ability to assess civil money penalties and impose other civil and criminal penalties, to issue cease-and-desist or removal orders, to appoint a conservator to conserve the assets of an institution for the benefit of its depositors and creditors and to initiate injunctive actions against banks and bank holding companies and “institution affiliated parties,” as defined in the Federal Deposit Insurance Act. In general, these enforcement actions may be initiated for violations of laws and regulations, and engagement in unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. At the state level, the PADBS also has broad enforcement powers over S&T Bank, including the power to impose fines and other penalties and to appoint a conservator or receiver. Interstate Banking and Branching The BHCA currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide and state-imposed deposit concentration limits. In addition, because of changes to law made by the Dodd-Frank Act, S&T Bank may now establish de novo branches in any state to the same extent that a bank chartered in that state could establish a branch. 10 Table of Contents Item 1. BUSINESS -- continued Community Reinvestment, Fair Lending and Consumer Protection Laws In connection with its lending activities, S&T Bank is subject to a number of state and federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. The federal laws include, among others, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Truth-in-Savings Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act and the CRA. In addition, federal rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent the disclosure of certain personal information to nonaffiliated third parties. The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate-income neighborhoods. Furthermore, such assessment is required of any bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. In the case of a bank holding company, including a financial holding company, applying for approval to acquire a bank or bank holding company, the Federal Reserve Board will assess the record of each subsidiary bank of the applicant bank holding company in considering the application. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory.” S&T Bank was rated “satisfactory” in its most recent CRA evaluation. With respect to consumer protection, the Dodd-Frank Act created the Consumer Financial Protection Bureau, or the CFPB, which took over rulemaking responsibility on July 21, 2011 for the principal federal consumer financial protection laws, such as those identified above. Institutions that have assets of $10 billion or less, such as S&T Bank, are subject to the rules established by the CFPB but will continue to be supervised in this area by their state and primary federal regulators, which in the case of S&T Bank is the FDIC. The Dodd-Frank Act also gives the CFPB expanded data collection powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices. The consumer complaint function also has been consolidated into the CFPB with respect to the institutions it supervises. The CFPB established an Office of Community Banks and Credit Unions, with a mission to ensure that the CFPB incorporates the perspectives of small depository institutions into the policy-making process, communicates relevant policy initiatives to community banks and credit unions, and works with community banks and credit unions to identify potential areas for regulatory simplification. Fair lending laws prohibit discrimination in the provision of banking services, and the enforcement of these laws has been a focus for bank regulators. Fair lending laws include the Equal Credit Opportunity Act and the Fair Housing Act, which outlaw discrimination in credit transactions and residential real estate on the basis of prohibited factors including, among others, race, color, national origin, sex and religion. A lender may be liable for policies that result in a disparate treatment of or have a disparate impact on a protected class of applicants or borrowers. If a pattern or practice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the U.S. Department of Justice, or DOJ, for investigation. In December of 2012, the DOJ and the CFPB entered into a Memorandum of Understanding under which the agencies have agreed to share information, coordinate investigations and have generally committed to strengthen their coordination efforts. S&T Bank is required to have a fair lending program that is of sufficient scope to monitor the inherent fair lending risk of the institution and that appropriately remediates issues which are identified. During 2013, the CFPB issued a series of final rules related to mortgage loan origination and mortgage loan servicing. In particular, on January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth-in-Lending Act, as amended by the Dodd-Frank Act (“QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good-faith determinations that borrowers are able to repay their mortgage loans before extending the credit, based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a QM incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43 percent debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet government-sponsored enterprise, or GSE, Federal Housing Administration, or FHA, and Veterans Affairs, or VA, underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43 percent debt-to-income limits. The QM Rule became effective on January 10, 2014. These rules did not have a material impact on our mortgage business. 11 Table of Contents Item 1. BUSINESS -- continued In November 2013, the CFPB issued a final rule implementing the Dodd-Frank Act requirement to establish integrated disclosures in connection with mortgage origination, which incorporates disclosure requirements under the Real Estate Settlement Procedures Act and the Truth-in-Lending Act. The requirements of the final rule apply to all covered mortgage transactions for which S&T Bank receives a consumer application on or after October 3, 2015. The CFPB issued a final rule regarding the integrated disclosures in December 2013, and the disclosure requirement became effective in October 2015. These rules did not have a material impact on our mortgage business. Anti-Money Laundering Rules S&T Bank is subject to the Bank Secrecy Act, its implementing regulations and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require S&T Bank to take steps to prevent the bank from being used to facilitate the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. S&T Bank is also required to develop and implement a comprehensive anti-money laundering compliance program. Banks must also have in place appropriate “know your customer” policies and procedures which includes requirements to (1) identify and verify, subject to certain exceptions, the identity of the beneficial owners of all legal entity customers at the time a new account is opened, and (2) include in its anti-money laundering program, risk-based procedures for conducting ongoing customer due diligence, which are to include procedures that (a) assist in understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (b) require ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act of 2001 require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when considering applications for bank mergers and bank holding company acquisitions. Other Dodd-Frank Provisions In December 2013, federal regulators adopted final regulations regarding the Volcker Rule established in the Dodd-Frank Act. The Volcker Rule generally prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies generally covering hedge funds and private equity funds, subject to certain exemptions. Banking entities had until July 21, 2017 to conform their activities to the requirements of the rule. Because S&T generally does not engage in the activities prohibited by the Volcker Rule, the effectiveness of the rule has not had a material effect on S&T Bank or its affiliates. In addition, the Dodd-Frank Act provides that the amount of any interchange fee charged for electronic debit transactions by debit card issuers having assets over $10 billion must be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted a rule which limits the maximum permissible interchange fees that such issuers can receive for an electronic debit transaction. This rule, Regulation II, which was effective October 1, 2011, does not apply to a bank that, together with its affiliates, has less than $10 billion in assets, which includes S&T. Competition S&T Bank competes with other local, regional and national financial services providers, such as other financial holding companies, commercial banks, credit unions, finance companies and brokerage and insurance firms, including competitors that provide their products and services online and through mobile devices. Some of our competitors are not subject to the same level of regulation and oversight that is required of banks and bank holding companies and are thus able to operate under lower cost structures. Our wealth management business competes with trust companies, mutual fund companies, investment advisory firms, law firms, brokerage firms and other financial services companies. Changes in bank regulation, such as changes in the products and services banks can offer and permitted involvement in non-banking activities by bank holding companies, as well as bank mergers and acquisitions, can affect our ability to compete with other financial services providers. Our ability to do so will depend upon how successfully we can respond to the evolving competitive, regulatory, technological and demographic developments affecting our operations. 12 Table of Contents Item 1. BUSINESS -- continued Our customers are primarily in Pennsylvania and the contiguous states of Ohio, West Virginia, New York, Maryland and Delaware. The majority of our commercial and consumer loans are made to businesses and individuals in these states resulting in a geographic concentration. Our market area has a high density of financial institutions, some of which are significantly larger institutions with greater financial resources than us, and many of which are our competitors to varying degrees. Our competition for loans comes principally from commercial banks, mortgage banking companies, credit unions, online lenders and other financial service companies. Our most direct competition for deposits has historically come from commercial banks and credit unions. We face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. Because larger competitors have advantages in attracting business from larger corporations, we do not generally attempt to compete for that business. Instead, we concentrate our efforts on attracting the business of individuals, and small and medium-size businesses. We consider our competitive advantages to be customer service and responsiveness to customer needs, the convenience of banking offices and hours, access to electronic banking services and the availability and pricing of our customized banking solutions. We emphasize personalized banking and the advantage of local decision-making in our banking business. The financial services industry is likely to become more competitive as further technological advances enable more companies to provide financial services on a more efficient and convenient basis. Technological innovations have lowered traditional barriers to entry and enabled many companies to compete in financial services markets. Many customers now expect a choice of banking options for the delivery of services, including traditional banking offices, telephone, internet, mobile, ATMs, self-service branches, in-store branches and/or digital and technology based solutions. These delivery channels are offered by traditional banks and savings associations, credit unions, brokerage firms, asset management groups, financial technology companies, finance and insurance companies, internet-based companies, and mortgage banking firms. 13 Item 1A. RISK FACTORS Investments in our common stock involve risk. The following discussion highlights the risks that we believe are material to S&T, potentially impacting our business, results of operations, financial condition and cash flows. However, other factors not discussed below or elsewhere in this Annual Report on Form 10-K could adversely affect our businesses, results of operations and financial condition. Therefore, the risk factors below do necessarily include all risks that we may face. Risks Related to the COVID-19 Pandemic The duration and severity of the COVID-19 pandemic, in our principal area of operations, nationally and globally, has adversely impacted and will likely continue to adversely impact S&T’s business, results of operations and financial condition. While it is difficult to predict the further impact of the COVID-19 pandemic (or any other outbreak) on the economy and S&T, the future impacts may include, but are not limited to, the following: • Our results of operations may continue to be negatively impacted by general economic or business conditions and uncertainty, including the • • strength of economic conditions in our principal area of operations impacting the demand for our products and services. The low interest rate environment will continue to negatively impact our net interest income and net interest margin. Credit losses may be higher and our provision for credit losses may continue to increase, due to deterioration in the financial condition of S&T’s commercial and consumer loan customers. • Declining asset and collateral values may necessitate increases in our provision for credit losses and net charge-offs. • • Continued negative impact on the hospitality industry and our hotel portfolio, which could result in additional credit losses and net charge-offs. Expense management will be impacted by the uncertainty of the effects of the pandemic and S&T’s continued efforts to promote the health and safety of our employees, and the customers and communities we serve. • We may have an interruption or cessation of an important service provided by a third-party provider. • • Any new or revised regulations regarding capital and liquidity adopted in response to the COVID-19 pandemic may require us to maintain S&T’s liquidity and regulatory capital could be adversely impacted. • • materially more capital or liquidity. Investors may have less confidence in the equity markets in general and in financial services industry in particular, which could have a negative impact on S&T’s stock price and resulting market valuation. The economic downturn caused by the pandemic may be deeper and last longer in the areas where we do business, relative to other areas of the country, which could negatively affect our relative financial performance. • We face heightened cyber security risk in connection with our operation in a remote working environment. • It may become harder to maintain our corporate culture, which is somewhat dependent on a level of in-person interaction. Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover. It is uncertain how long this recovery will take. As a result, we anticipate our business may be adversely affected during this recovery. To the extent the COVID-19 pandemic continues to adversely affect the global economy it may also increase the likelihood and/or magnitude of other risks described in this section. The impact that the COVID-19 pandemic will have on S&T’s credit losses is uncertain, and continued economic uncertainty and deterioration in the forward looking economic forecasts used to estimate credit losses, as well as the potential inability of our credit models to accurately predict the relevant financial metrics, may adversely affect our ACL. S&T calculates the ACL in accordance with Current Expected Credit Loss, or CECL, accounting standard adopted January 1, 2020. The CECL methodology reflects expected credit losses and requires consideration of a broad range of reasonable and supportable information to form credit loss estimates. The CECL accounting standard bases the measurement of expected credit losses on historical loss experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. S&T’s ability to assess expected credit losses may be impaired if the models and approaches we use become less predictive of future behaviors. In particular, the reliance on supportable economic forecasts in light of the COVID-19 pandemic has had and is expected to have an impact on the estimates of our ACL. These forecasts have deteriorated this year and continue to reflect adverse economic conditions and economic uncertainty. Given the unprecedented nature of the COVID-19 pandemic, if our credit models fail to adequately predict or forecast relevant financial metrics during and after the pandemic and these forecasts deteriorate and contain economic uncertainty, our ACL may be adversely affected. 14 Item 1A. RISK FACTORS - continued Risks Related to Fraudulent Activity Fraudulent activity associated with our products and services could adversely affect our results of operations, financial condition and stock price, negatively impact our brand and reputation, and result in regulatory intervention or sanctions. As a financial institution we are exposed to operational risk in the form of fraudulent activity that may be committed by customers, other third parties, or employees, targeting us and our customers. The risk of fraud continues to increase for the financial services industry. Fraudulent activity has escalated, become more sophisticated, and continues to evolve, as there are more options to access financial services. In our Form 8-K filed May 26, 2020, we disclosed that we discovered customer fraud resulting from a check kiting scheme by a business customer of S&T. We recognized a pre-tax loss of $58.7 million during the second quarter of 2020 related to this customer fraud. As a result of our internal review of the fraud, we have made process and monitoring enhancements. While we believe we have operational risk controls in place to prevent or detect future instances of fraud or to mitigate the impact of any fraud, we cannot provide assurance that we can prevent or detect fraud or that we will not experience future fraud losses or incur costs or other damage related to such fraud, at levels that adversely affect our results of operation, financial condition, or stock price. Furthermore, fraudulent activity could negatively impact our brand and reputation, which could also adversely affect our results of operation, financial condition, or stock price. Fraudulent activity could also lead to regulatory intervention or regulatory sanctions. Risks Related to Credit Our ability to assess the credit-worthiness of our customers may diminish, which may adversely affect our results of operations. We incur credit risk by virtue of making loans and extending loan commitments and letters of credit. Credit risk is one of our most significant risks. Our exposure to credit risk is managed through the use of consistent underwriting standards that emphasize “in-market” lending while avoiding excessive industry and other concentrations. Our credit administration function employs risk management techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. There can be no assurance that such measures will be effective in avoiding undue credit risk. If the models and approaches that we use to select, manage and underwrite our consumer and commercial loan products become less predictive of future charge-offs, due to events adversely affecting our customers, including rapid changes in the economy, we may have higher credit losses. The value of the collateral used to secure our loans may not be sufficient to compensate for the amount of an unpaid loans and we may be unsuccessful in recovering the remaining balances from our customers. Decreases in real estate values, particularly with respect to our commercial lending and mortgage activities, could adversely affect the value of property used as collateral for our loans and our customers’ ability to repay these loans, which in turn could impact our profitability. Repayment of our commercial loans is often dependent on the cash flow of the borrower, which may become unpredictable. If the value of the assets, such as real estate, serving as collateral for the loan portfolio were to decline materially, a significant part of the loan portfolio could become under-collateralized. If the loans that are secured by real estate become troubled when real estate market conditions are declining or have declined, in the event of foreclosure, we may not be able to realize the amount of collateral that was anticipated at the time of originating the loan. This could result in higher charge-offs which could have a material adverse effect on our operating results and financial condition. Changes in the overall credit quality of our portfolio can have a significant impact on our earnings. Like other lenders, we face the risk that our customers will not repay their loans. We reserve for losses in our loan portfolio based on our assessment of inherent credit losses. This process, which is critical to our financial results and condition, requires complex judgment including our assessment of economic conditions, which are difficult to predict. Through a periodic review of the loan portfolio, management determines the amount of the ACL by considering historical losses combined with qualitative factors including changes in lending policies and practices, economic conditions, changes in the loan portfolio, changes in lending management, results of internal loan reviews, asset quality trends, collateral values, concentrations of credit risk and other external factors. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control. Although we have policies and procedures in place to determine future losses, due to the subjective nature of this area, there can be no assurance that our management has accurately assessed the level of allowances reflected in our Consolidated Financial Statements. We may underestimate our inherent losses and fail to hold an ACL sufficient to account for these losses. Incorrect assumptions could lead to material underestimates of inherent losses and an inadequate ACL. As our assessment of inherent losses changes, we may need to increase or decrease our ACL, which could significantly impact our financial results and profitability. 15 Item 1A. RISK FACTORS - continued The adoption of ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, referred to as CECL, effective for us on January 1, 2020, resulted in a significant change in how we recognize credit losses. If the assumptions or estimates we used in adopting the new standard are incorrect or we need to change our underlying assumptions, there may be a material adverse impact on our results of operations and financial condition. Effective January 1, 2020, we adopted CECL, which replaces the incurred loss impairment methodology in current U.S. generally accepted accounting principles, or GAAP, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The measurement of expected credit losses is to be based on historical loss experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss model which delayed recognition until it was probable a loss had been incurred. Upon origination of a loan, the estimate of expected credit losses, and any subsequent changes to such estimate, will be recorded through provision for credit losses in our consolidated statement of income. The CECL model may create more volatility in the level of our ACL. The CECL model permits the use of judgment in determining the approach that is most appropriate for us, based on facts and circumstances. Changes in economic conditions affecting borrowers, new information regarding our loans and other factors, both within and outside of our control, may require an increase in the ACL. Actual credit losses may exceed our estimate of expected losses. We will continue to periodically review and update our CECL methodology, models and the underlying assumptions, estimates and assessments we use to establish our ACL under the CECL standard to reflect our view of current conditions and reasonable and supportable forecasts. We will implement further enhancements or changes to our methodology, models and the underlying assumptions, estimates and assessments, as needed. If the assumptions we used in developing our estimate of expected credit losses require updating over time, there may be a material adverse impact on our results of operations and financial condition. For additional information on our adoption of the CECL standard, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Our loan portfolio is concentrated within our market area, and our lack of geographic diversification increases our risk profile. The regional economic conditions within our market area affect the demand for our products and services as well as the ability of our customers to repay their loans and the value of the collateral securing these loans. A significant decline in the regional economy caused by inflation, recession, unemployment or other factors could negatively affect our customers, the quality of our loan portfolio and the demand for our products and services. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market area. Our loan portfolio has a significant concentration of commercial real estate loans. The majority of our loans are to commercial borrowers and 53 percent of our total loans are commercial real estate, or CRE, and construction loans with real estate as the primary collateral. The CRE segment of our loan portfolio typically involves higher loan principal amounts, and the repayment of these loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Because payments on loans secured by CRE often depend upon the successful operation and management of the properties, repayment of these loans may be affected by factors outside the borrower’s control, including adverse conditions in the real estate market or the economy. Additionally, we have a number of significant credit exposures to commercial borrowers, and while the majority of these borrowers have numerous projects that make up the total aggregate exposure, if one or more of these borrowers default or have financial difficulties, we could experience higher credit losses, which could adversely impact our financial condition and results of operations. In December 2015, the FDIC and the other federal financial institution regulatory agencies released a new statement on prudent risk management for commercial real estate lending. In this statement, the agencies express concerns about easing commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that they will continue to pay special attention to commercial real estate lending activities and concentrations going forward. 16 Item 1A. RISK FACTORS - continued Risks Related to Our Operations Failure to keep pace with technological changes could have a material adverse effect on our results of operations and financial condition. The financial services industry is constantly undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better service customers and reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy their demands, as well as create additional efficiencies within our operations. Many of our large competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services quickly or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition and results of operations. A failure in or breach of our operational or security systems or infrastructure, or those of third parties, could disrupt our businesses, and adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm. Our operational and security systems, infrastructure, including our computer systems, data management and internal processes, as well as those of third parties, are integral to our business. We rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human error, misconduct or malfeasance, or failure or breach of third- party systems or infrastructure, expose us to risk. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with our own systems. We handle a substantial volume of customer and other financial transactions every day. Our financial, accounting, data processing, check processing, electronic funds transfer, loan processing, online and mobile banking, automated teller machines, or ATMs, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. This could adversely affect our ability to process these transactions or provide these services. There could be sudden increases in customer transaction volume, electrical, telecommunications or other major physical infrastructure outages, natural disasters, events arising from local or larger scale political or social matters, including terrorist acts, and cyber attacks. We continuously update these systems to support our operations and growth. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational risk exposures could adversely impact our results of operations, liquidity and financial condition, and cause reputational harm. 17 Item 1A. RISK FACTORS - continued A cyber attack, information or security breach, or a technology failure of ours or of a third-party could adversely affect our ability to conduct our business or manage our exposure to risk, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause reputational harm. Our business is highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact. Cyber security risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties, including foreign state actors. Our operations rely on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. We rely on digital technologies, computer, database and email systems, software, and networks to conduct our operations. In addition, to access our network and products and services, our customers and third parties may use personal mobile devices or computing devices that are outside of our network environment. Financial services institutions have been subject to, and are likely to continue to be the target of, cyber attacks, including computer viruses, malicious or destructive code, phishing attacks, denial of service or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of the institution, its employees or customers or of third parties, or otherwise materially disrupt network access or business operations. For example, denial of service attacks have been launched against a number of large financial institutions and several large retailers have disclosed substantial cyber security breaches affecting debit and credit card accounts of their customers. We have experienced cyber security incidents in the past and although not material, we anticipate that, as a growing regional bank, we could experience further incidents. There can be no assurance that we will not suffer material losses or other material consequences relating to technology failure, cyber attacks or other information or security breaches. In addition to external threats, insider threats also present a risk to us. Insiders, having legitimate access to our systems and the information contained in them, have the opportunity to make inappropriate use of the systems and information. We have policies, procedures, and controls in place designed to prevent or limit this risk, but we cannot guarantee that these policies, procedures and controls fully mitigate this risk. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Any of these matters could result in our loss of customers and business opportunities, significant disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance costs. In addition, any of the matters described above could adversely impact our results of operations and financial condition. We rely on third-party providers and other suppliers for a number of services that are important to our business. An interruption or cessation of an important service by any third-party could have a material adverse effect on our business. We are dependent for the majority of our technology, including our core operating system, on third-party providers. If these companies were to discontinue providing services to us, we may experience significant disruption to our business. In addition, each of these third parties faces the risk of cyber attack, information breach or loss, or technology failure. If any of our third-party service providers experience such difficulties, or if there is any other disruption in our relationships with them, we may be required to find alternative sources of such services. We are dependent on these third-party providers securing their information systems, over which we have limited control, and a breach of their information systems could adversely affect our ability to process transactions, service our clients or manage our exposure to risk and could result in the disclosure of sensitive, personal customer information, which could have a material adverse impact on our business through damage to our reputation, loss of business, remedial costs, additional regulatory scrutiny or exposure to civil litigation and possible financial liability. Assurance cannot be provided that we could negotiate terms with alternative service sources that are as favorable or could obtain services with similar functionality as found in existing systems without the need to expend substantial resources, if at all, thereby resulting in a material adverse impact on our business and results of operations. 18 Item 1A. RISK FACTORS - continued Risks Related to Interest Rates and Investments Our net interest income could be negatively affected by interest rate changes which may adversely affect our financial condition. Our results of operations are largely dependent on net interest income, which is the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Therefore, any change in general market interest rates, including changes resulting from the Federal Reserve Board’s policies, can have a significant effect on our net interest income and total income. There may be mismatches between the maturity and repricing of our assets and liabilities that could cause the net interest rate spread to compress, depending on the level and type of changes in the interest rate environment. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental agencies. In addition, some of our customers often have the ability to prepay loans or redeem deposits with either no penalties or penalties that are insufficient to compensate us for the lost income. A significant reduction in our net interest income will adversely affect our business and results of operations. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed. Declines in the value of investment securities held by us could require write-downs, which would reduce our earnings. In order to diversify earnings and enhance liquidity, we own both debt and equity instruments of government agencies, municipalities and other companies. We may be required to record impairment charges on our debt securities if they suffer a decline in value due to the underlying credit of the issuer. Additionally, the value of these investments may fluctuate depending on the interest rate environment, general economic conditions and circumstances specific to the issuer. Volatile market conditions may detrimentally affect the value of these securities, such as through reduced valuations due to the perception of heightened credit or liquidity risks. Changes in the value of these instruments may result in a reduction to earnings and/or capital, which may adversely affect our results of operations and financial condition. Risks Related to Our Business Strategy Our strategy includes growth plans through organic growth and by means of acquisitions. Our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. We intend to continue pursuing a growth strategy through organic growth within our current footprint and through market expansion. We also actively evaluate acquisition opportunities as another source of growth. We cannot give assurance that we will be able to expand our existing market presence, or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy. Our failure to find suitable acquisition candidates, or successfully bid against other competitors for acquisitions, could adversely affect our ability to fully implement our business strategy. If we are successful in acquiring other entities, the process of integrating such entities, including DNB, will divert significant management time and resources. We may not be able to integrate efficiently or operate profitably, DNB or any entity we may acquire. We may experience disruption and incur unexpected expenses in integrating acquisitions. These failures could adversely impact our future prospects and results of operation. The transition in our CEO position will be critical to our success and our business could be negatively impacted if we do not successfully manage this transition. On October 2, 2020, we announced that Todd D. Brice will retire as Chief Executive Officer of S&T and S&T Bank, and as a member of the Boards of Directors of S&T and S&T Bank, effective March 31, 2021. We are currently engaged in a search for a new Chief Executive Officer (CEO). Our future performance will depend, in part, on the successful transition of our new Executive. The departure of key leadership personnel, such as a CEO, can take from the company significant knowledge and experience. This loss of knowledge and experience can be mitigated through successful hiring and transition, but there can be no assurance that we will be successful in such efforts. Any failure to timely hire a qualified CEO could hinder the Company’s strategic planning, execution and future performance. The ability of a new CEO to quickly expand their knowledge of our business plans, operations and strategies will be critical to their ability to make informed decisions about our strategy and operations. Further, if our new CEO formulates different or changed views, the future strategy and plans of the Company may differ materially from those of the past. While Mr. Brice entered into a letter agreement intended to facilitate a smooth transition under which he has agreed to provide advisory services to S&T and S&T Bank during the period from his retirement until the third anniversary thereof, if we do not successfully manage this transition, it could be viewed negatively by our 19 Item 1A. RISK FACTORS - continued customers, employees or investors and could have an adverse impact on our business and strategic direction. We are subject to competition from both banks and non-banking companies. The financial services industry is highly competitive, and we encounter strong competition for deposits, loans and other financial services in our market area, including online providers of these products and services. Our principal competitors include other local, regional and national financial services providers, such as other financial holding companies, commercial banks, credit unions, finance companies and brokerage and insurance firms, including competitors that provide their products and services online. Many of our non-bank competitors are not subject to the same degree of regulation that we are and have advantages over us in providing certain services. Additionally, many of our competitors are significantly larger than we are and have greater access to capital and other resources. Failure to compete effectively for deposit, loan and other financial services customers in our markets could cause us to lose market share, slow our growth rate and have an adverse effect on our financial condition and results of operations. We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed. We are required by federal regulatory authorities to maintain adequate capital levels to support operations. While we believe we currently have sufficient capital, if we cannot raise additional capital when needed, we may not be able to meet these requirements. In addition, our ability to further expand our operations through organic growth, which includes growth within our current footprint and growth through market expansion, may be adversely affected by any inability to raise necessary capital. Our ability to raise additional capital at any given time is dependent on capital market conditions at that time and on our financial performance and outlook. Risks Related to Regulatory Compliance and Legal Matters We are subject to extensive governmental regulation and supervision. We are subject to extensive state and federal regulation, supervision and legislation that govern nearly every aspect of our operations. The regulations are primarily intended to protect depositors, customers and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes. Other changes to statutes, regulations or policies could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs of regulatory compliance and of doing business, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things, and could divert management’s time from other business activities. Failure to comply with applicable laws, regulations, policies or supervisory guidance could lead to enforcement and other legal actions by federal or state authorities, including criminal or civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, and/or damage to our reputation. The ramifications and uncertainties of the level of government intervention in the U.S. financial system could also adversely affect us. Our controls and policies and procedures may fail or be circumvented, which may result in a material adverse effect on our business, financial condition and results of operations. Management regularly reviews and updates our internal controls, disclosure controls and procedures, operating, risk management and corporate governance policies and procedures. Any system of controls, policies and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of internal controls, disclosure controls and procedures, or operating, risk management and corporate governance policies and procedures, whether as a result of human error, misconduct or malfeasance, or failure to comply with regulations related to controls and policies and procedures could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we may in the future discover areas of our internal controls, disclosure controls and procedures, or operating, risk management and corporate governance policies and procedures that need improvement. Failure to maintain effective controls or to timely implement any necessary improvement of our internal and disclosure controls, or operating, risk management and corporate governance policies and procedures, could, among other things, result in losses from errors, harm our reputation, or cause investors to lose confidence in our reported financial information, all of which could have a material adverse effect on our results of operations and financial condition. 20 Item 1A. RISK FACTORS - continued As a participating lender in the Paycheck Protection Program, or PPP, we are subject to risks of litigation from our customers or other parties in connection with our processing of loans for the PPP and risks that the Small Business Administration may not fund some or all PPP loans. We participate as a lender in the PPP. Due to the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the program, which exposes us to risks relating to noncompliance with the PPP. Since the opening of the PPP, several large banks have been subject to litigation relating to the policies and procedures they used in processing applications for the program. We may be exposed to the risk of litigation, from both customers and non-customers who approached us requesting PPP loans, regarding the process and procedures used by us in processing applications for the PPP. Any such litigation filed against us may be costly, regardless of the outcome, and result in significant financial liability or adversely affect our reputation. In addition, while the PPP loans are fully guaranteed by the Small Business Administration, or SBA, and we believe that the majority of these loans will be forgiven, there can be no assurance that the borrowers will use or have used the funds appropriately or will have satisfied the staffing or payment requirements to qualify for forgiveness in whole or in part. Any portion of the loan that is not forgiven must be repaid by the borrower. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by us, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if we have already been paid under the guaranty, seek recovery from us of any loss related to the deficiency. Negative public opinion could damage our reputation and adversely impact our earnings and liquidity. Reputational risk, or the risk to our business, earnings, liquidity and capital from negative public opinion, is inherent in our operations. Negative public opinion could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues or inadequate protection of customer information. Financial companies are highly vulnerable to reputational damage when they are found to have harmed customers, particularly retail customers, through conduct that is illegal or viewed as unfair, deceptive, manipulative or otherwise wrongful. We are dependent on third-party providers for a number of services that are important to our business. Refer to the risk factor titled, “We rely on third-party providers and other suppliers for a number of services that are important to our business. An interruption or cessation of an important service by any third-party could have a material adverse effect on our business.” for additional information. A failure by any of these third-party service providers could cause a disruption in our operations, which could result in negative public opinion about us or damage to our reputation. We expend significant resources to comply with regulatory requirements, and the failure to comply with such regulations could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers and employees, expose us to litigation and regulatory action and adversely impact our earnings and liquidity. 21 Item 1A. RISK FACTORS - continued Our ability to pay dividends on our common stock may be limited Holders of our common stock will be entitled to receive only such dividends as our Board of Directors may declare out of funds legally available for such payments. The payment of common dividends by S&T is subject to certain requirements and limitations of Pennsylvania law. Although we have historically declared cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce, suspend or eliminate our dividend at any time. Substantial portions of our revenue consist of dividend payments we receive from S&T Bank. The payment of common dividends by S&T Bank is subject to certain requirements and limitations under federal and state laws and regulations that limit the amount of dividends it can pay to S&T. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. Any decrease to or elimination of the dividends on our common stock could adversely affect the market price of our common stock. We may be adversely impacted by the transition from LIBOR as a reference rate. On July 27, 2017, the Financial Conduct Authority in the United Kingdom announced that it would phase out LIBOR as a benchmark by the end of 2021. In late 2020, the ICE Benchmark Administration (IBA) extended the cessation date for submission and publication of rates for all LIBOR currency- tenor pairs until June 30, 2023, except for the one-week and two-month USD LIBOR tenors, which will cease on December 31, 2021. U.S. regulators, including the U.S. Federal Reserve, published a statement supporting the IBA’s plans but also urged banks to phase out LIBOR as soon as practicable. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities, as its preferred alternative rate for LIBOR. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR or if the phase-out could cause LIBOR to perform differently than in the past. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements. We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations. Risks Related to Liquidity We rely on a stable core deposit base as our primary source of liquidity. We are dependent for our funding on a stable base of core deposits. Our ability to maintain a stable core deposit base is a function of our financial performance, our reputation and the security provided by FDIC insurance, which combined, gives customers confidence in us. If any of these considerations deteriorates, the stability of our core deposits could be harmed. In addition, deposit levels may be affected by factors such as general interest rate levels, rates paid by competitors, returns available to customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on other sources of liquidity to meet withdrawal demands or otherwise fund operations. Our ability to meet contingency funding needs, in the event of a crisis that causes a disruption to our core deposit base, is dependent on access to wholesale markets, including funds provided by the FHLB of Pittsburgh. We own stock in the Federal Home Loan Bank of Pittsburgh, or FHLB, in order to qualify for membership in the FHLB system, which enables us to borrow on our line of credit with the FHLB that is secured by a blanket lien on a significant portion of our loan portfolio. Changes or disruptions to the FHLB or the FHLB system in general may materially impact our ability to meet short and long-term liquidity needs or meet growth plans. Additionally, we cannot be assured that the FHLB will be able to provide funding to us when needed, nor can we be certain that the FHLB will provide funds specifically to us, should our financial condition and/or our regulators prevent access to our line of credit. The inability to access this source of funds could have a materially adverse effect on our ability to meet our customer’s needs. Our financial flexibility could be severely constrained if we were unable to maintain our access to funding or if adequate financing is not available at acceptable interest rates. 22 Item 1A. RISK FACTORS - continued Risks Related to Owning Our Stock The market price of our common stock may fluctuate significantly in response to a number of factors. Our quarterly and annual operating results have varied significantly in the past and could vary significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, including the changing U.S. economic environment and changes in the commercial and residential real estate market, any of which may cause our stock price to fluctuate. If our operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Our stock price can fluctuate significantly in response to a variety of factors including, among other things: • • • • • • • • • volatility of stock market prices and volumes in general; changes in market valuations of similar companies; changes in the conditions of credit markets; changes in accounting policies or procedures as required by the Financial Accounting Standards Board, or FASB, or other regulatory agencies; legislative and regulatory actions, including the impact of the Dodd-Frank Act and related regulations, that may subject us to additional regulatory oversight which may result in increased compliance costs and/or require us to change our business model; government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; additions or departures of key members of management; fluctuations in our quarterly or annual operating results; and changes in analysts’ estimates of our financial performance. General Risk Factors We may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on our financial condition and results of operations. From time to time, customers and others make claims and take legal action pertaining to the performance of our responsibilities. Whether customer claims and legal action related to the performance of our responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant expenses, attention from management and financial liability. Any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. 23 Item 1B. UNRESOLVED STAFF COMMENTS There are no unresolved SEC staff comments. Item 2. PROPERTIES S&T Bancorp, Inc. headquarters is located in Indiana, Pennsylvania. We operate in five markets including Western Pennsylvania, Eastern Pennsylvania, Northeast Ohio, Central Ohio and Upstate New York. At December 31, 2020, we operate 76 banking branches and 5 loan production offices, of which 45 are leased facilities. 25 Item 3. LEGAL PROCEEDINGS The nature of our business generates a certain amount of litigation that arises in the ordinary course of business. However, in management’s opinion, there are no proceedings pending that we are a party to or to which our property is subject that would be material in relation to our financial condition or results of operations. In addition, no material proceedings are pending nor are known to be threatened or contemplated against us by governmental authorities or other parties. Item 4. MINE SAFETY DISCLOSURES Not applicable. 26 PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Stock Prices and Dividend Information Our common stock is listed on the NASDAQ Global Select Market System, or NASDAQ, under the symbol STBA. As of the close of business on January 31, 2021, we had approximately 2,784 shareholders of record. The number of record-holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees. As discussed under "Our ability to pay dividends on our common stock may be limited." included in Item 1A. Risk Factors in Part I, the amount and timing of dividends is subject to the discretion of the Board and depends upon business conditions and regulatory requirements. The Board has the discretion to change the dividend at any time for any reason. Certain information relating to securities authorized for issuance under equity compensation plans is set forth under the heading Equity Compensation Plan Information in Part III, Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Report. Purchases of Equity Securities The following table is a summary of our purchases of common stock during the fourth quarter of 2020: Period 10/1/2020 - 10/31/2020 11/1/2020 - 11/30/2020 12/1/2020 - 12/31/2020 Total Total number of shares purchased — Average price paid per share — $ — — — — — — $ Total number of shares purchased as part of publicly announced plan (1) — — — — Approximate dollar value of shares that may yet be purchased under the plan 37,441,683 $ 37,441,683 37,441,683 37,441,683 $ (1) On September 16, 2019, our Board of Directors authorized a $50 million share repurchase plan. This repurchase authorization, which is effective through March 31, 2021, permits S&T to repurchase from time to time up to $50 million in aggregate value of shares of S&T's common stock through a combination of open market and privately negotiated repurchases. The specific timing, price and quantity of repurchases will be at the discretion of S&T and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and S&T's financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. We expect to fund any repurchases from cash on hand and internally generated funds. Repurchase activity was suspended in March 2020 as the impact of the COVID-19 pandemic spread. 27 Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES - continued Five-Year Cumulative Total Return The following chart compares the cumulative total shareholder return on our common stock with the cumulative total shareholder return of the NASDAQ Composite Index and the NASDAQ Bank Index assuming a $100 investment in each on December 31, 2015 and the reinvestment of dividends. (2) (1) Index S&T Bancorp, Inc. NASDAQ Composite NASDAQ Bank (2) (1) 12/31/2015 100.00 100.00 100.00 12/31/2016 130.40 108.92 137.97 Period Ending 12/31/2017 135.91 141.36 145.50 12/31/2018 132.27 137.39 121.96 12/31/2019 144.82 187.87 151.69 12/31/2020 93.56 272.51 140.31 (1) (2) The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market. The NASDAQ Bank Index contains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as Banks. These companies include banks providing a broad range of financial services, including retail banking, loans and money transmissions. 28 Item 6. SELECTED FINANCIAL DATA The tables below summarize selected consolidated financial data as of the dates or for the periods presented and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and the Financial Statements and Supplementary Data in Part II, Item 8 of this Report. The below tables include the merger with DNB on November 30, 2019, the sale of a majority interest of our insurance business on January 1, 2018 and the effects of the enactment of the Tax Act in 2017. CONSOLIDATED BALANCE SHEETS (dollars in thousands) Total assets Securities, at fair value Loans held for sale Portfolio loans, net of unearned income Goodwill Total deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Total shareholders’ equity CONSOLIDATED STATEMENTS OF NET INCOME (dollars in thousands) Interest income Interest expense Provision for credit losses Net Interest Income After Provision for Credit Losses Noninterest income Noninterest expense Net Income Before Taxes Provision for income taxes Net Income 2019 8,764,649 784,283 5,256 7,137,152 371,621 7,036,576 19,888 281,319 50,868 64,277 1,191,998 $ December 31, 2018 7,252,221 684,872 2,371 5,946,648 287,446 5,673,922 18,383 470,000 70,314 45,619 935,761 $ 2017 7,060,255 698,291 4,485 5,761,449 291,670 5,427,891 50,161 540,000 47,301 45,619 884,031 Years Ended December 31, 2019 320,484 73,693 14,873 231,918 52,558 167,116 117,360 19,126 98,234 $ $ 2018 289,826 55,388 14,995 219,443 49,181 145,445 123,179 17,845 105,334 $ $ 2017 260,642 34,909 13,883 211,850 55,462 147,907 119,405 46,437 72,968 2016 6,943,053 693,487 3,793 5,611,419 291,670 5,272,377 50,832 660,000 14,713 45,619 841,956 2016 227,774 24,515 17,965 185,294 54,635 143,232 96,697 25,305 71,392 $ $ $ $ $ $ $ $ $ 2020 8,967,897 773,693 18,528 7,225,860 373,424 7,420,538 65,163 75,000 23,681 64,083 1,154,711 2020 320,464 41,076 131,424 147,964 59,719 186,644 21,039 (1) 21,040 29 Item 6. SELECTED FINANCIAL DATA - continued SELECTED PER SHARE DATA AND RATIOS Refer to Explanation of Use of Non-GAAP Financial Measures below for a discussion of common tangible book value, common return on average tangible common equity and the ratio of tangible common equity to tangible assets as non-GAAP financial measures. Per Share Data Earnings per common share—basic Earnings per common share—diluted Dividends declared per common share Dividend payout ratio Common book value Common tangible book value (non-GAAP) Profitability Ratios Common return on average assets Common return on average equity Common return on average tangible common equity (non-GAAP) Capital Ratios Common equity/assets Tangible common equity/tangible assets (non-GAAP) Tier 1 leverage ratio Common equity tier 1 Risk-based capital—tier 1 Risk-based capital—total Asset Quality Ratios Nonaccrual loans/loans Nonperforming assets/loans plus OREO Allowance for credit losses/total portfolio loans Allowance for credit losses/nonperforming loans Net loan charge-offs/average loans Explanation of Use of Non-GAAP Financial Measures $ $ $ $ $ 2020 0.54 0.53 1.12 200.89 % 29.38 19.71 0.23 % 1.80 % 2.92 % 12.88 % 9.02 % 9.43 % 11.33 % 11.74 % 13.44 % 2.03 % 2.06 % 1.63 % 80 % 1.40 % $ $ $ $ $ 2019 2.84 2.82 1.09 38.03 % 30.13 20.52 1.32 % 9.98 % 14.41 % 13.60 % 9.68 % 10.29 % 11.43 % 11.84 % 13.22 % 0.76 % 0.81 % 0.87 % 115 % 0.22 % December 31, 2018 $ $ $ $ $ 3.03 3.01 0.99 32.79 % 26.98 18.63 1.50 % 11.60 % 17.14 % 12.90 % 9.28 % 10.05 % 11.38 % 11.72 % 13.21 % 0.77 % 0.83 % 1.03 % 132 % 0.18 % $ $ $ $ $ 2017 2.10 2.09 0.82 39.15 % 25.28 16.87 1.03 % 8.37 % 12.77 % 12.52 % 8.72 % 9.17 % 10.71 % 11.06 % 12.55 % 0.42 % 0.42 % 0.98 % 236 % 0.18 % $ $ $ $ $ 2016 2.06 2.05 0.77 37.52 % 24.12 15.67 1.08 % 8.67 % 13.71 % 12.13 % 8.23 % 8.98 % 10.04 % 10.39 % 11.86 % 0.76 % 0.77 % 0.94 % 124 % 0.25 % In addition to traditional measures presented in accordance with GAAP, our management uses, and this Report contains or references, certain non- GAAP financial measures identified below. We believe these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. We believe the presentation of net interest income on an FTE basis ensures comparability of net interest income arising from both taxable and tax- exempt sources and is consistent with industry practice. Interest income per the Consolidated Statements of Net Income is reconciled to net interest income adjusted to an FTE basis in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in this Report. The efficiency ratio is noninterest expense divided by noninterest income plus net interest income, on an FTE basis, which ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. 30 Item 6. SELECTED FINANCIAL DATA - continued Common tangible book value, common return on average tangible common equity and the ratio of tangible common equity to tangible assets exclude goodwill and other intangible assets in order to show the significance of the tangible elements of our assets and common equity. Total assets and total average assets are reconciled to total tangible assets and total tangible average assets. Total shareholders' equity and total average shareholders' equity are also reconciled to total tangible common equity and total tangible average common equity. These measures are consistent with industry practice. RECONCILIATIONS OF GAAP TO NON-GAAP RATIOS (dollars in thousands) Common tangible book value (non-GAAP) Total shareholders' equity Less: goodwill and other intangible assets Tax effect of other intangible assets Tangible common equity (non-GAAP) Common shares outstanding Common tangible book value (non-GAAP) Common return on average tangible common shareholders' equity (non-GAAP) Net income Plus: amortization of intangibles Tax effect of amortization of intangibles Net income before amortization of intangibles Total average shareholders’ equity (GAAP Basis) Less: average goodwill and average other intangible assets Tax effect of other intangible assets Tangible average common shareholders' equity (non-GAAP) Common return on average tangible common shareholders' equity (non-GAAP) Efficiency Ratio (non-GAAP) Noninterest expense Less: merger related expenses Noninterest expense excluding nonrecurring items Net interest income per Consolidated Statements of Net Income Plus: taxable equivalent adjustment Noninterest income Less: securities (gains) losses, net Net interest income (FTE) (non-GAAP) plus noninterest income Efficiency ratio (non-GAAP) Tangible common equity (non-GAAP) Total shareholders' equity (GAAP basis) Less: goodwill and other intangible assets Tax effect of other intangible assets Tangible common equity (non-GAAP) Total assets (GAAP basis) Less: goodwill and other intangible assets Tax effect of other intangible assets Tangible assets (non-GAAP) Tangible common shareholders' equity/tangible assets (non-GAAP) 2020 2019 2018 2017 2016 December 31 1,154,711 (382,099) 1,822 774,434 39,298 19.71 21,040 2,532 (532) 23,040 1,169,489 (382,907) 2,061 788,643 1,191,998 (382,540) 2,293 811,751 39,560 20.52 98,234 836 (176) 98,894 983,908 (298,228) 639 686,319 935,761 (290,047) 546 646,260 34,684 18.63 105,334 861 (181) 106,014 908,355 (290,380) 614 618,589 884,031 (295,347) 1,287 589,971 34,972 16.87 72,968 1,233 (432) 73,769 872,130 (295,937) 1,493 577,686 841,956 (296,580) 1,719 547,095 34,913 15.67 71,392 1,615 (565) 72,442 823,607 (297,377) 1,992 528,222 2.92 % 14.41 % 17.14 % 12.77 % 13.71 % 186,644 (2,342) 184,302 279,388 3,202 59,719 (142) 342,167 167,116 (11,350) 155,766 246,791 3,757 52,558 26 303,132 145,445 — 145,445 234,438 3,804 49,181 — 287,423 147,907 — 147,907 225,733 7,493 55,462 (3,000) 285,688 143,232 — 143,232 203,259 7,043 54,635 — 264,938 53.86 % 51.39 % 50.60 % 51.77 % 54.06 % 1,154,711 (382,099) 1,822 774,434 8,967,897 (382,099) 1,822 8,587,620 1,191,998 (382,540) 2,293 811,751 8,764,649 (382,540) 2,293 8,384,402 935,761 (290,047) 546 646,260 7,252,221 (290,047) 546 6,962,720 884,031 (295,347) 1,287 589,971 7,060,255 (295,347) 1,287 6,766,195 841,956 (296,580) 1,719 547,095 6,943,053 (296,580) 1,719 6,648,192 9.02 % 9.68 % 9.28 % 8.72 % 8.23 % 31 Item 6. SELECTED FINANCIAL DATA - continued The following profitability metrics are adjusted to exclude merger related expenses from the DNB merger for the year ended: (dollars in thousands) Diluted Earnings Per Share Net income Adjust for merger related expenses Tax effect of merger related expenses Net income excluding merger related expenses (non-GAAP) Average shares outstanding - diluted Diluted adjusted earnings per share (non-GAAP) Common Return on Average Tangible Common Shareholders' Equity (non-GAAP) Net income Adjust for merger related expenses Tax effect of merger related expenses Net income excluding merger related expenses Plus: amortization of intangibles Tax effect of amortization of intangibles Adjusted net income Total average shareholders’ equity (GAAP Basis) Less: average goodwill and average other intangible assets Tax effect of other intangible assets Tangible average common shareholders' equity (non-GAAP) Common return on average tangible common shareholders' equity (non-GAAP) Return on Average Assets (non-GAAP) Net income excluding merger related expenses Average total assets Return on average assets (non-GAAP) Return on Average Shareholders' Equity (non-GAAP) Net income excluding merger related expenses Average total shareholders' equity Return on average shareholders' equity (non-GAAP) 32 December 31, 2020 2019 $ $ $ $ $ $ $ 21,040 2,342 (492) 22,890 39,070 0.59 21,040 2,342 (492) 22,890 2,532 (532) 24,890 1,169,489 (382,907) 2,061 788,643 3.16 % 22,890 9,152,747 0.25 % 22,890 1,169,489 1.96 % $ $ $ $ $ $ $ 98,234 11,350 (2,106) 107,478 34,723 3.09 98,234 11,350 (2,106) 107,478 836 (176) 108,138 983,908 (298,228) 639 686,319 15.76 % 107,478 7,435,536 1.45 % 107,478 983,908 10.92 % 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”, “believe”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”, “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward- looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses and the credit risk of our commercial and consumer loan products; changes in the level of charge-offs and changes in estimates of the adequacy of the allowance for credit losses, or ACL; cyber security concerns; rapid technological developments and changes; operational risks or risk management failures by us or critical third parties, including fraud risk; our ability to manage our reputational risks; sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; the transition from LIBOR as a reference rate; regulatory supervision and oversight, including changes in regulatory capital requirements and our ability to address those requirements; unanticipated changes in our liquidity position; changes in accounting policies, practices, or guidance, for example, our adoption of CECL; legislation affecting the financial services industry as a whole, and S&T, in particular; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions, including DNB, cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; containing costs and expenses; reliance on significant customer relationships; an interruption or cessation of an important service by a third-party provider; our ability to attract and retain talented executives and employees; our ability to successfully manage our CEO transition; general economic or business conditions, including the strength of regional economic conditions in our market area; the duration and severity of the coronavirus (“COVID-19”) pandemic, both in our principal area of operations and nationally, including the ultimate impact of the pandemic on the economy generally and on our operations; our participation in the Paycheck Protection Program; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; the stability of our core deposit base and access to contingency funding; re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Many of these factors, as well as other factors, are described elsewhere in this report, including Part I, Item 1A, Risk Factors and any of our subsequent filings with the SEC. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made. 33 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Critical Accounting Policies and Estimates Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported. Our most significant accounting policies are presented in Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report. These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the Consolidated Financial Statements and how those values are determined. We view critical accounting policies to be those which are highly dependent on subjective or complex estimates, assumptions and judgments and where changes in those estimates and assumptions could have a significant impact on the Consolidated Financial Statements. We currently view the determination of the ACL, goodwill and other intangible assets and accounting for acquisitions to be critical accounting policies. We have updated our ACL policy in response to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. During 2019, we identified accounting for business combinations as a critical accounting policy due to our merger with DNB. Otherwise, we did not significantly change the manner in which we applied our critical accounting policies or developed related assumptions or estimates. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee. Allowance for Credit Losses The ACL is a valuation reserve established and maintained by charges against operating income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans. The ACL for homogeneous loans is calculated using a life-time loss rate methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. The ACL model is comprised of six distinct portfolio segments: 1) Construction, 2) Commercial Real Estate, or CRE, 3) Commercial and Industrial, or C&I, 4) Business Banking, 5) Consumer Real Estate and 6) Other Consumer. Each segment has a distinct set of risk characteristics monitored by management. We further evaluate the ACL at a disaggregated level which includes type of collateral and our internal risk rating system for the commercial segments and type of collateral, lien position, and FICO score, for the consumer segments. Historical credit loss experience is the basis for the estimation of expected credit losses. Our quantitative model uses historic data back to the second quarter of 2009. We apply historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on the unemployment forecast and management judgment. For periods beyond our two year reasonable and supportable forecast, we revert to historical loss rates utilizing a straight-line method over a one year reversion period. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, experience and ability of lending staff, quality of the bank’s loan review system, value of underlying collateral, the existence of and changes in concentrations and other external factors. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities. The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all commercial loans greater than $0.5 million that meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) any commercial troubled debt restructuring, or TDR, or any loan reasonably expected 34 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued to become a TDR whether on accrual or nonaccrual status and 4) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the recorded investment in the loan balance. Our ACL Committee meets quarterly to verify the overall appropriateness of the ACL. Additionally, on an annual basis, the ACL Committee meets to validate our ACL methodology. This validation includes reviewing the loan segmentation, critical model assumptions, forecast and the qualitative framework. As a result of this ongoing monitoring process, we may make changes to our ACL to be responsive to the economic environment. Although we believe our process for determining the ACL appropriately considers all the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual losses are higher than management estimates, additional provision for credit losses could be required and could adversely affect our earnings or financial position in future periods. Allowance for Loan Losses Prior to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, we calculated our allowance for loan losses, or ALL, using an incurred loan loss methodology. The following policy related to the ALL in prior periods. Our loan portfolio is our largest category of assets on our Consolidated Balance Sheets. We have designed a systematic ALL methodology which is used to determine our provision for loan losses and ALL on a quarterly basis. The ALL represents management’s estimate of probable losses inherent in the loan portfolio at the balance sheet date and is presented as a reserve against loans in the Consolidated Balance Sheets. The ALL is increased by a provision charged to expense and reduced by charge-offs, net of recoveries. Determination of an adequate ALL is inherently subjective and may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: evaluation and impairment tests of individual loans and evaluation and impairment tests of certain groups of homogeneous loans with similar risk characteristics. We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the original contractual terms of the loan agreement. For all troubled debt restructurings, or TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate. Specific reserves are established based upon the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate, 2) the loan’s observable market price or 3) the estimated fair value of the collateral if the loan is collateral dependent. These analyses involve a high degree of judgment in estimating the amount of loss associated with specific impaired loans, including estimating the amount and timing of future cash flows, the current estimated fair value of the loan and collateral values. Our impairment evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. We obtain appraisals annually on impaired loans greater than $0.5 million. The ALL methodology for groups of homogeneous loans, or the reserve for loans collectively evaluated for impairment, is comprised of both a quantitative and qualitative analysis. We first apply historical loss rates to pools of loans, with similar risk characteristics, using a migration analysis where losses in each pool are aggregated over the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from when an event happens that causes the borrower to be unable to pay on a loan until the loss is confirmed through a loan charge-off. In conjunction with our annual review of the ALL assumptions prior to 2020, we updated our analysis of LEPs for our Commercial and Consumer loan portfolio segments using our loan charge-off history. Based on our updated analysis, we shortened our LEP over the construction portfolio from 4 years to 3 years and made no other changes. We estimate an LEP of 3 years for CRE, 3 years for construction and 1.25 years for C&I. We estimate an LEP of 2.75 years for Consumer Real Estate and 1.25 years for Other Consumer. Another key assumption is the look-back period, or LBP, which represents the historical period utilized to calculate loss rates. We used 10.5 years for our LBP for all portfolio segments which encompasses our loss experience during the 2008 - 2010 Financial Crisis and our more recent improved loss experience. After consideration of the historic loss calculations, management applies additional qualitative adjustments so that the ALL is reflective of the inherent losses that exist in the loan portfolio at the balance sheet date. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio, changes in 35 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued lending management, results of internal loan reviews, asset quality trends, collateral values, concentrations of credit risk and other external factors. The evaluation of the various components of the ALL requires considerable judgment in order to estimate inherent loss exposures. Our ALL Committee meets at least quarterly to verify the overall adequacy of the ALL. Additionally, on an annual basis, the ALL Committee meets to validate our ALL methodology. This validation includes reviewing the loan segmentation, LEP, LBP and the qualitative framework. As a result of this ongoing monitoring process, we may make changes to our ALL to be responsive to the economic environment. Although we believe our process for determining the ALL adequately considers all of the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual losses are higher than management estimates, additional provisions for loan losses could be required and could adversely affect our earnings or financial position in future periods. Goodwill and Other Intangible Assets As a result of acquisitions, we have recorded goodwill and identifiable intangible assets in our Consolidated Balance Sheets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. We have one reporting unit, Community Banking. Existing goodwill relates to value inherent in the Community Banking reporting unit and that value is dependent upon our ability to provide quality, cost-effective services in the face of competition from other market participants. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of our services. As such, goodwill value is supported ultimately by profitability that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill, which could adversely impact our earnings in the period in which impairment occurs. The carrying value of goodwill is tested annually for impairment each October 1st or more frequently if events and circumstances indicate that it may be impaired. We test for impairment by comparing the fair value of our Community Banking reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Determining the fair value of a reporting unit is judgmental and involves the use of significant estimates and assumptions. The fair value of the reporting unit is determined by using both a discounted cash flow model and market based models. The discounted cash flow model has many assumptions including future earnings projections, a long-term growth rate and discount rate. The market based method calculates the fair value based on observed price multiples for similar companies. The fair values of each method are then weighted based on the relevance and reliability in the current economic environment. We determine the amount of identifiable intangible assets based upon independent core deposit and insurance contract valuations at the time of acquisition. Intangible assets with finite useful lives, consisting primarily of core deposit and customer list intangibles, are amortized using straight-line or accelerated methods over their estimated weighted average useful lives, ranging from 10 to 20 years. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No such events or changes in circumstances occurred during the years ended December 31, 2020, 2019 and 2018. The financial services industry and securities markets can be adversely affected by declining values. If economic conditions result in a prolonged period of economic weakness in the future, our business may be adversely affected. In the event that we determine that our goodwill is impaired, recognition of an impairment charge could have a significant adverse impact on our financial position or results of operations in the period in which the impairment occurs. Business Combinations We account for business combinations using the acquisition method of accounting. All identifiable assets acquired, liabilities assumed and any non- controlling interest in the acquiree are recognized and measured as of the acquisition date at fair value. We record goodwill for the excess of the purchase price over the fair value of net assets acquired. Results of operations of the acquired entities are included in the consolidated statement of income from the date of acquisition. Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related ACL. Determining the fair value of acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. In estimating the fair value of our acquired loans, we considered a number of factors including loss rates, internal risk rating, delinquency status, loan type, loan term, prepayment rates, recovery periods and the current interest rate environment. The premium or discount estimated through the loan fair value calculation is recognized into interest income on a level yield basis over the remaining life of the loans. Acquired loans, including those acquired in a business combination, are evaluated to determine if they have experienced more-than-insignificant deterioration in credit quality since origination. When the condition exists, these loans are referred to as purchased credit deteriorated, or PCD. An allowance is recognized for a PCD loan by adding it to the purchase price or fair 36 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued value in a business combination. There is no provision for credit losses, or PCL, recognized upon acquisition of a PCD loan since the initial allowance is established through the purchase accounting. After initial recognition, the accounting for a PCD loan follows the credit loss model that applies to that type of asset. Purchased financial loans that do not have a more-than-significant deterioration in credit quality since origination are accounted for in a manner consistent with originated loans. An ACL is recorded with a corresponding charge to PCL. Subsequent to the acquisition date, the methods utilized to estimate the required ACL for these loans is similar to the method used for originated loans. Prior to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the methods utilized to estimate the required ALL for acquired loans was similar to the method used for originated loans; however, we recorded a provision for credit losses only when the required allowance exceeded the remaining fair value adjustment. Acquired loans were considered impaired if there was evidence of credit deterioration since origination and if it was probable at time of acquisition that all contractually required payments would not be collected. Recent Accounting Pronouncements and Developments Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which is included in Part II, Item 8 of this Report, discusses new accounting pronouncements that we have adopted and the expected impact of accounting pronouncements recently issued or proposed, but not yet required to be adopted. Executive Overview We are a bank holding company that is headquartered in Indiana, Pennsylvania with assets of $9.0 billion at December 31, 2020. We operate in five markets including Western Pennsylvania, Eastern Pennsylvania, Northeast Ohio, Central Ohio and Upstate New York. We provide a full range of financial services with retail and commercial banking products, cash management services, trust and brokerage services. Our common stock trades on the NASDAQ Global Select Market under the symbol "STBA". We earn revenue primarily from interest on loans and securities and fees charged for financial services provided to our customers. We incur expenses for the cost of deposits and other funding sources, provision for credit losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense. Our mission is to become the financial services provider of choice within the markets that we serve which will enable us to be a high performing regional community bank. We strive to do this by delivering exceptional service and value. Our strategic plan follows a disciplined approach focused on organic growth, which includes both growth within our current footprint and through market expansion. We employ a geographic market-based growth platform in order to drive organic growth. We acknowledge that each of our five markets are in different stages of development and that our market based strategy will allow us to customize our approach to each market given its developmental stage and unique characteristics. We also actively evaluate acquisition opportunities that align with our strategic objectives as another source of growth. Our strategic plan includes a collaborative model that combines expertise from all areas of our business and focuses on satisfying each customer’s individual financial objectives. We continuously work to maintain and improve the efficiency of our different lines of business. As we continue to navigate through the uncertainty resulting from the COVID-19 pandemic, our first priority is the safety of both our employees and customers. Our financial performance has been negatively impacted in many ways due to the COVID-19 pandemic. We are closely monitoring our asset quality with a focus on the portfolios that have been significantly impacted by the COVID-19 pandemic, including our hotel portfolio. We have increased our ACL to be responsive to this additional risk within our loan portfolio. Our balance sheet is asset sensitive so we have experienced a negative impact to our net interest income and net interest margin, or NIM, as interest rates declined in the first half of 2020. Our net interest income is also being impacted by declining loan balances as new loan originations have decreased in the current environment. Offsetting this impact was the origination of $555.9 million of Paycheck Protection Program, or PPP, loans during 2020. Our noninterest income has also been negatively impacted due to changes in our customers' behavior during these times which has been somewhat mitigated by strong mortgage banking income due to significant refinance activity. We are taking a prudent approach to capital management given the economic uncertainty. Our internally-run capital stress test results demonstrate that we have adequate capital cushions. We are well capitalized and we believe that we have sufficient excess capital to manage through the uncertainty resulting from the COVID-19 pandemic. In response to the current economic environment as a result of the COVID-19 pandemic, we completed an interim quantitative goodwill impairment analysis as of November 30, 2020 and updated our analysis as of December 31, 2020. Based upon our impairment analysis, we determined that our goodwill of $373.4 million was not impaired at December 31, 2020. We experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme during 2020. This matter was disclosed in our Form 8-K filed on May 26, 2020. The fraud was perpetrated by a single business customer and the customer has plead guilty in a criminal investigation. This fraud loss reduced net income by $46.3 million, or $1.19 per diluted share, in 2020. We continue to pursue all available sources of recovery to mitigate the loss. An internal review of the matter has been completed and various process and monitoring enhancements have been implemented. The customer also 37 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued had a lending relationship of $14.8 million, including a $14.0 million CRE loan and an $0.8 million line of credit. We recognized a $8.9 million charge-off related to this lending relationship during 2020. Results of Operations Year Ended December 31, 2020 COVID-19 Update S&T has monitored the impact of the COVID-19 pandemic throughout the year and has taken steps to mitigate the potential risks and impact on S&T and to promote the health and safety of our employees, and the customers and communities that we serve. We have taken preventive health measures for our employees through rigorous sanitation, social distancing, wearing masks, remote work where feasible and providing access to financial wellness programs. We reopened our branches with extensive safety measures and are encouraging our customers to use online and mobile banking solutions. We have also extended our solution center hours to allow for customer consultation without entering a branch. Our Business Continuity teams were activated and have guided our efforts to respond to the rapidly developing situation. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program, or PPP, a $349 billion program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. The Paycheck Protection Program and Health Care Enhancement Act, or PPP/HCEA, was signed into law on April 24, 2020. The PPP/HCEA authorized an additional $310 billion of funding under the CARES Act for PPP loans among other provisions. On July 4, 2020, legislation was passed to extend the application period for the PPP through August 8, 2020. These loans are intended to cover eight weeks of payroll and other permitted expenses to help those businesses remain viable. As of December 31, 2020, we originated $555.9 million of PPP loans. 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. The extent to which COVID-19 may adversely impact our business depends on future developments which are highly uncertain and unpredictable. The COVID-19 pandemic has had, and we expect that it will continue to have, negative impacts on S&T’s commercial and consumer loan customers and the economy as a whole. The pandemic caused, among other things, an increase in the provision for credit losses, a higher ACL as a percentage of total portfolio loans for each of the quarters ended in 2020 compared to December 31, 2019, and exclusive of the increase in portfolio loans due to the PPP portfolio, a decrease in portfolio loans compared to December 31, 2019. The severity and length of the COVID-19 pandemic’s impact on S&T and the U.S. and global economies continues to be unknown. In order to assist our customers through this difficult period, we have provided the following assistance, which may have an adverse impact on our results in the short term, but which we believe will provide better outcomes in the long term for our customers and for S&T. • We provided needs-based payment deferrals and modifications to interest only periods to commercial loans during 2020 totaling $1.2 billion. Only $195.6 million remain on deferral at December 31, 2020. • We provided loan payment deferrals, with no negative credit bureau reporting, to mortgage and consumer loans during 2020 totaling $69.0 million. No loans remain on deferral at December 31, 2020. • We paused foreclosures/repossessions for mortgages and consumer loans. Earnings Summary Net income decreased $77.2 million, or 78.6 percent, to $21.0 million, or $0.53 per diluted share, in 2020 compared to $98.2 million, or $2.82 per diluted share in 2019. Net income in 2020 was significantly impacted by a $46.3 million after-tax, or $1.19 per diluted share, fraud loss. The 2019 results included $11.4 million, or $0.27 per diluted share, of merger related 38 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued expenses. The DNB merger results have been included in our financial statements since the consummation of the merger on November 30, 2019. Net interest income increased $32.6 million, or 13.2 percent, to $279.4 million compared to $246.8 million in 2019 primarily due to the merger with DNB in late 2019. Average interest-earnings assets increased $1.5 billion, or 21.6 percent, to $8.4 billion compared to 2019. Average interest-bearing liabilities increased $862.2 million, or 17.7 percent, to $5.7 billion compared to 2019 with increases in average interest-bearing deposits of $923.1 million offset by decreases in borrowings of $61.0 million. Net interest margin, on a fully taxable-equivalent, or FTE, basis (non-GAAP), decreased 26 basis points to 3.38 percent for 2020 compared to 3.64 percent for 2019. Net interest margin is reconciled to net interest income adjusted to an FTE basis below in the "Net Interest Income" section of this MD&A. The provision for credit losses was $131.4 million for 2020 compared to $14.9 million in 2019. Excluding the customer fraud loss of $58.7 million, the provision for credit losses increased $57.8 million to $72.7 million for 2020 compared to $14.9 million in 2019. The significant increase in the provision for credit losses during the year was mainly due to the impact of the COVID-19 pandemic and our adoption of CECL on January 1, 2020. The COVID-19 pandemic has negatively impacted the hospitality industry resulting in deterioration in our $248 million hotel portfolio. Net loan charge-offs increased $89.7 million to $103.4 million, or 1.40 percent of average loans, for 2020 compared to $13.6 million, or 0.22 percent of average loans, in 2019. Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.60 percent in 2020. Total noninterest income increased $7.1 million to $59.7 million compared to $52.6 million in 2019. Total noninterest income includes a full-year impact of the DNB merger for 2020 compared to one month in 2019. Additionally, the increase in noninterest income related to an increase of $8.4 million in mortgage banking income to $10.9 million compared to 2019 due to the strong refinance activity in the current interest rate environment. Noninterest expense increased $19.5 million to $186.6 million for 2020 compared to $167.1 million for 2019. Total noninterest expense includes a full- year impact of the DNB merger for 2020 compared to one month in 2019 with increases in most noninterest expense categories. FDIC insurance increased $4.3 million due to the DNB merger, the impact of recent financial results on certain components of the assessment calculation and Small Bank Assessment Credits received in 2019. These increases were offset by a $9.0 million decrease in merger related expenses compared to 2019. The income tax provision decreased to nearly zero for 2020 compared to an expense of $19.1 million in 2019. The decrease in our income tax provision was mainly due to a $96.3 million decrease in taxable income in 2020 compared to 2019. 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. 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. The following table reconciles interest income per the Consolidated Statements of Net Income to net interest income and rates on an FTE basis for the periods presented: (dollars in thousands) Total interest income Total interest expense Net interest income per Consolidated Statements of Net Income Adjustment to FTE basis Net Interest Income (FTE) (non-GAAP) Net interest margin Adjustment to FTE basis Net Interest Margin (FTE) (non-GAAP) $ $ Years Ended December 31, 2020 2019 2018 $ $ 320,464 41,076 279,388 3,202 282,590 3.34 % 0.04 3.38 % $ $ 320,484 73,693 246,791 3,757 250,548 3.58 % 0.06 3.64 % 289,826 55,388 234,438 3,803 238,241 3.58 % 0.06 3.64 % 39 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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: 2020 2019 2018 Interest Rate Interest Rate Interest Rate $ $ $ (dollars in thousands) ASSETS Interest-bearing deposits with banks Securities at fair value Loans held for sale (2)(3) Commercial real estate Commercial and industrial Commercial construction Total commercial loans Residential mortgage Home equity Installment and other consumer Consumer construction Total consumer loans (1)(2) Total portfolio loans Total Loans Federal Home Loan Bank and other restricted stock Total Interest-earning Assets Noninterest-earning assets Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand Money market Savings Certificates of deposit Total Interest-bearing deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Total borrowings Total Interest-bearing Liabilities Noninterest-bearing liabilities Shareholders’ equity Total Liabilities and Shareholders’ Equity $ (2)(3) Net Interest Income Net Interest Margin (2)(3) $ $ Average Balance 179,887 764,311 5,105 3,347,234 2,018,318 442,088 5,807,640 964,740 539,461 80,032 13,484 1,597,717 7,405,357 7,410,462 18,234 8,372,894 779,853 9,152,747 961,823 2,040,116 899,717 1,517,643 5,419,299 57,673 155,753 47,953 64,092 325,471 5,744,770 2,238,488 1,169,489 9,152,747 515 19,011 160 140,288 77,752 16,702 234,742 40,998 21,469 5,248 594 68,309 303,051 303,211 929 304,140 2,681 11,645 972 20,688 35,986 169 1,434 1,201 2,286 5,090 41,076 $ $ Average Balance 59,941 678,069 2,169 2,945,278 1,575,485 278,665 4,799,428 765,604 475,149 72,283 10,896 1,323,932 6,123,360 6,125,529 21,833 6,885,372 550,164 7,435,536 641,403 1,691,910 766,142 1,396,706 4,496,161 16,863 255,264 66,392 47,934 386,453 4,882,614 1,569,014 983,908 7,435,536 1,233 17,876 84 144,877 79,429 14,237 238,543 33,889 25,208 5,173 593 64,863 303,406 303,490 1,642 324,241 3,915 30,236 1,928 26,947 63,026 110 6,416 1,831 2,310 10,667 73,693 0.29 % $ 2.49 % 3.13 % 4.19 % 3.85 % 3.78 % 4.04 % 4.25 % 3.98 % 6.56 % 4.40 % 4.28 % 4.09 % 4.09 % 5.10 % 3.87 % $ 0.28 % $ 0.57 % 0.11 % 1.36 % 0.66 % 0.29 % 0.92 % 2.50 % 3.57 % 1.56 % 0.72 % $ 3.38 % (1) (2) (3) Nonaccruing loans are included in the daily average loan amounts outstanding. Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent . Taxable investment income is adjusted for the dividend-received deduction for equity securities. 40 $ $ Average Balance 56,210 682,806 1,515 2,779,096 1,441,560 314,265 4,534,921 696,849 474,538 67,047 5,336 1,243,770 5,778,691 5,780,206 30,457 6,549,679 494,149 7,043,828 570,459 1,299,185 836,747 1,328,985 4,035,376 45,992 525,172 47,986 45,619 664,769 4,700,145 1,435,328 908,355 7,043,828 1,042 17,860 85 132,139 67,770 15,067 214,976 29,772 22,981 4,594 267 57,614 272,590 272,675 2,052 293,629 1,883 18,228 1,773 18,972 40,856 221 11,082 1,129 2,100 14,532 55,388 2.06 % $ 2.64 % 3.88 % 4.92 % 5.04 % 5.11 % 4.97 % 4.43 % 5.31 % 7.16 % 5.44 % 4.90 % 4.95 % 4.95 % 7.52 % 4.71 % $ 0.61 % $ 1.79 % 0.25 % 1.93 % 1.40 % 0.65 % 2.51 % 2.76 % 4.82 % 2.76 % 1.51 % $ 3.64 % 1.85 % 2.62 % 5.60 % 4.75 % 4.70 % 4.79 % 4.74 % 4.27 % 4.84 % 6.85 % 5.00 % 4.63 % 4.72 % 4.72 % 6.74 % 4.48 % 0.33 % 1.40 % 0.21 % 1.43 % 1.01 % 0.48 % 2.11 % 2.35 % 4.60 % 2.19 % 1.18 % 3.64 % $ 282,590 $ 250,548 $ 238,241 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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: (dollars in thousands) Interest earned on: Interest-bearing deposits with banks Securities at fair value Loans held for sale (2)(3) Commercial real estate Commercial and industrial Commercial construction Total commercial loans Residential mortgage Home equity Installment and other consumer Consumer construction Total consumer loans (1)(2) Total portfolio loans Total loans Federal Home Loan Bank and other restricted stock Change in Interest Earned on Interest-earning Assets Interest paid on: Interest-bearing demand Money market Savings Certificates of deposit Total interest-bearing deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Total borrowings Change in Interest Paid on Interest-bearing Liabilities Change in Net Interest Income 2020 Compared to 2019 Increase (Decrease) Due to 2019 Compared to 2018 Increase (Decrease) Due to Volume (4) Rate (4) Net Volume (4) Rate (4) Net $ $ $ $ $ 2,467 $ 2,274 114 19,772 22,326 8,349 50,447 8,815 3,412 555 141 12,923 63,370 63,484 (271) 67,954 $ 1,956 $ 6,223 336 2,333 10,848 266 (2,501) (509) 779 (1,965) 8,883 $ 59,071 $ (3,185) $ (1,139) (38) (24,361) (24,003) (5,884) (54,248) (1,706) (7,151) (480) (140) (9,477) (63,725) (63,763) (442) (68,529) $ (3,190) $ (24,814) (1,292) (8,592) (37,888) (207) (2,481) (121) (803) (3,612) (41,500) $ (27,029) $ (718) 1,135 76 (4,589) (1,677) 2,465 (3,801) 7,109 (3,739) 75 1 3,446 (355) (279) (713) (575) (1,234) (18,591) (956) (6,259) (27,040) 59 (4,982) (630) (24) (5,577) (32,617) 32,042 $ $ $ $ $ 69 $ (124) 37 7,902 6,296 (1,707) 12,491 2,937 30 359 278 3,604 16,095 16,132 (581) 15,496 $ 234 $ 5,510 (150) 967 6,561 (140) (5,696) 433 107 (5,296) 1,265 $ 14,231 $ 122 $ 140 (38) 4,836 5,363 877 11,076 1,180 2,197 220 48 3,645 14,721 14,683 171 15,116 $ 1,798 $ 6,498 305 7,008 15,609 29 1,030 269 103 1,431 17,040 $ (1,924) $ 191 16 (1) 12,738 11,659 (830) 23,567 4,117 2,227 579 326 7,249 30,816 30,815 (410) 30,612 2,032 12,008 155 7,975 22,170 (111) (4,666) 702 210 (3,865) 18,305 12,307 (1) (2) (3) (4) Nonaccruing loans are included in the daily average loan amounts outstanding. Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent. Taxable investment income is adjusted for the dividend-received deduction for equity securities. Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. Net interest income on an FTE basis (non-GAAP) increased $32.0 million, or 12.8 percent, compared to 2019. Net interest income was favorably impacted by purchase accounting fair value adjustments of $4.8 million mainly related to the DNB merger. The net interest margin on an FTE basis (non- GAAP) decreased 26 basis points to 3.38% compared to 2019. This is mostly due to decreases in short-term interest rates of approximately 225 basis points. Purchase accounting fair value adjustments favorably impacted the net interest margin rate on an FTE basis by 6 basis points for 2020. Interest income on an FTE basis (non-GAAP) decreased $0.6 million, or 0.2 percent, compared to 2019. The change was primarily due to increases in average interest-earning assets of $1.5 billion offset by lower short-term interest rates compared to 2019. Average loan balances increased $1.3 billion compared to 2019 due to the DNB merger and organic loan growth. PPP loans contributed $380.1 million of the average increase in loans. The average rate earned on loans decreased 86 basis points primarily due to lower short-term interest rates. Average interest-bearing deposits with banks increased $119.9 million and the average rate earned decreased 177 basis points compared to 2019. Average investment securities increased $86.2 million and the average rate earned decreased 15 basis points. Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 84 basis points compared to 2019. Interest expense decreased $32.6 million compared to 2019. The decrease was primarily due to lower short-term interest 41 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued rates. Average interest-bearing deposits increased $923.1 million compared to 2019 due to the DNB merger and organic deposit growth. We experienced deposit growth throughout 2020 due to customer PPP loans and stimulus payments along with customers conservatively holding cash deposits in these uncertain times. The average rate paid decreased 74 basis points compared to 2019 primarily due to lower short-term interest rates. Average borrowings decreased $61.0 million due to increased deposits and the average rate paid decreased 120 basis points due to lower short-term interest rates. Overall, the cost of interest-bearing liabilities decreased 79 basis points compared to 2019. Provision for Credit Losses The provision for credit losses, which includes a provision for losses on loans and on unfunded loan commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The provision for credit losses increased $116.5 million to $131.4 million for 2020 compared to $14.9 million for 2019. We recognized a charge-off of $58.7 million related to a customer fraud from a check kiting scheme during the second quarter of 2020. The fraud was perpetrated by a single business customer and the customer has plead guilty in a criminal investigation. We continue to pursue all available sources of recovery to mitigate the loss. The customer also had a lending relationship of $14.8 million, including a $14.0 million commercial real estate loan and an $0.8 million line of credit which resulted in an additional $8.9 million charge-off in 2020. At December 31, 2020, $5.9 million remains outstanding as a nonperforming loan that has been fully charged down to the estimated sale price of the collateral. Excluding the customer fraud loss of $58.7 million, the provision for credit losses increased $57.8 million to $72.7 million for 2020 compared to $14.9 million in 2019. The significant increase in the provision for credit losses during the year was mainly due to the impact of the COVID-19 pandemic and our adoption of CECL on January 1, 2020. The COVID-19 pandemic has negatively impacted the hospitality industry resulting in deterioration in our $248 million hotel portfolio. The impact of COVID-19 was captured in our quantitative reserve as certain impacted loans were downgraded to special mention and substandard and in our qualitative reserve through our economic forecast and other qualitative adjustments. Commercial special mention, substandard and doubtful loans increased $281 million to $572 million compared to $290 million at December 31, 2019, with an increase of $162 million in substandard loans, $113 million in special mention loans and $11.4 million in doubtful loans. The increase in both special mention and substandard loans was mainly due to downgrades in our hotel portfolio. Specific reserves on loans individually assessed increased $11.3 million to $13.5 million compared to $2.2 million in 2019. Included in the $13.5 million of specific reserves was $6.7 million for loans in our hotel portfolio. Specific reserves for hotels were based on liquidation values from appraisals received in the fourth quarter of 2020. Our qualitative reserve increased $14.1 million in 2020 which included $8.6 million for the economic forecast and $3.2 million for portfolio allocations made in our hotel, business banking and C&I portfolios due to the COVID-19 pandemic. The change in reserve attributed to the economic forecast reflected reductions in the second and third quarters due to an improved economic forecast. Our forecast covers a period of two years and is driven primarily by national unemployment data. The change attributed to the portfolio allocations was primarily due to $3.0 million of ACL added for our business banking portfolio. Net loan charge-offs were $103.4 million, or 1.40% of average loans, in 2020 compared to $13.6 million, or 0.22% of average loans, during 2019. Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.60% in 2020. Refer to the Credit Quality section of this MD&A for further details. Noninterest Income (dollars in thousands) Securities gains, net Debit and credit card Service charges on deposit accounts Mortgage banking Wealth management Commercial loan swap income Other Total Noninterest Income NM- percentage change not meaningful 2020 142 15,093 11,704 10,923 9,957 4,740 7,160 59,719 $ $ Years Ended December 31, 2019 (26) 13,405 13,316 2,491 8,623 5,503 9,246 52,558 $ $ $ Change 168 1,688 (1,612) 8,432 1,334 (763) (2,086) 7,161 $ $ % Change NM 12.6 % (12.1) % 338.5 % 15.5 % (13.9) % (22.6) % 13.6 % Noninterest income increased $7.2 million, or 13.6 percent, in 2020 compared to 2019. Total noninterest income includes a full-year impact of the DNB merger for 2020 compared to one month in 2019. Our noninterest income has been negatively impacted due to changes in our customers' behavior during the pandemic. The increase in noninterest income primarily related 42 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued to higher mortgage banking income of $8.4 million compared to 2019 due to an increase in the volume of loans originated for sale in the secondary market resulting from a decline in mortgage interest rates. Debit and credit card fees increased $1.7 million compared to the prior year due to increased debit and credit card usage and the Merger. Wealth management fees increased $1.3 million due to the Merger. The $2.1 million decrease in other noninterest income was attributable to a change in the valuation of a deferred compensation plan, which has a corresponding offset in salaries and benefit expense resulting in no impact to net income, a change in the equity securities portfolio and a change in the credit valuation adjustment for our commercial loan swaps for risk associated with our hotel loan portfolio. Service charges on deposit accounts also decreased $1.6 million due to reduced activity related to the COVID-19 pandemic. Noninterest Expense (dollars in thousands) Salaries and employee benefits Data processing and information technology Net occupancy Merger-related expenses Furniture, equipment and software Marketing Professional services and legal Other taxes FDIC insurance Other expenses: Loan related expenses Joint venture amortization Supplies Postage Amortization of intangibles Other Total Other Noninterest Expense Total Noninterest Expense NM - percentage not meaningful $ $ 2020 90,115 15,499 14,529 2,342 11,050 5,996 6,394 6,622 5,089 5,044 3,215 1,318 1,262 2,531 15,638 29,008 Years Ended December 31, $ 2019 83,986 14,468 12,103 11,350 8,958 4,631 4,244 3,364 758 3,250 2,648 1,159 1,082 836 14,279 23,254 $ Change 6,129 1,031 2,426 (9,008) 2,092 1,365 2,150 3,258 4,331 1,794 567 159 180 1,695 1,359 5,754 $ 186,644 $ 167,116 $ 19,528 % Change 7.3 % 7.1 % 20.0 % NM 23.4 % 29.5 % 50.7 % 96.8 % 571.4 % 55.2 % 21.4 % 13.7 % 16.6 % 202.8 % 9.5 % 24.7 % 11.7 % Noninterest expense increased $19.5 million, or 11.7 percent, to $186.6 million in 2020 compared to 2019. Total noninterest expense includes a full- year impact of the DNB merger for 2020 compared to one month in 2019. Total merger expenses decreased $9.0 million compared to 2019. Total merger related expenses of $2.3 million in 2020 were comprised of $1.4 million of salaries and employee benefits, $0.4 million for data processing, $0.2 million for professional services and $0.3 million in various other expenses. The increases in net occupancy expense, furniture, equipment and software and other taxes related to the DNB merger. The increase in FDIC insurance of $4.3 million was due to the impact of recent results on certain components of the assessment calculation, such as our net loss in the second quarter of 2020 and also the Small Bank Assessment Credits that were received by all banking institutions with assets of less than $10 billion in third quarter 2019 that were not received in 2020. Also in addition to the merger, the increase of $3.3 million in other taxes was due to a one-time adjustment related to a state sales tax assessment in 2019. Salaries and employee benefits increased $6.1 million during 2020 primarily due to additional employees, mainly related to the merger, annual merit increases and higher pension expense due to an increase in retirees electing lump-sum distributions. Partially offsetting these increases were a decrease in restricted stock of $1.7 million and $3.0 million of deferred origination costs due to PPP loans and increased mortgage activity. Loan related expenses increased $1.8 million due to the customer fraud and increased mortgage volume. Professional services and legal expenses increased $2.1 million mainly due to higher legal expense. 43 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Federal Income Taxes The income tax provision was nearly zero compared to $19.1 million in 2019. The decrease in our income tax provision was mainly due to a $96.3 million decrease in net income before taxes in 2020 compared to 2019. The effective tax rate, which is total tax expense as a percentage of net income before taxes, decreased 16.3 percent in 2020 to a nominal negative annual effective tax rate compared to 16.3 percent in 2019. The decrease in the effective tax rate was primarily due to significantly lower net income before taxes in 2020 compared to 2019. Historically, we have generated an annual effective tax rate that is less than the statutory rate of 21 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on BOLI and tax benefits associated with Low Income Housing Tax Credits, or LIHTC. Results of Operations Year Ended December 31, 2019 Earnings Summary Net income decreased $7.1 million, or 6.7 percent, to $98.2 million, or $2.82 per diluted share, in 2019 compared to $105.3 million, or $3.01 per diluted share, in 2018. The 2019 results included $11.4 million, or $0.27 per diluted share, of merger related expenses. The DNB merger results have been included in our financial statements since the consummation of the merger on November 30, 2019. The decrease in net income was primarily due to an increase in noninterest expense of $21.7 million, that included $11.4 million of merger related expenses. This decrease was partially offset by increases in net interest income of $12.4 million and noninterest income of $3.4 million compared to 2018. Net interest income increased $12.4 million, or 5.3 percent, to $246.8 million compared to $234.4 million in 2018. Average interest-earning assets increased $335.7 million compared to 2018 to $6.9 billion. Average interest-bearing liabilities increased $182.5 million with increases in average interest- bearing deposits of $460.8 million offset by decreases in borrowings of $278.3 million. Net interest margin, on a fully taxable-equivalent, or FTE, basis (non-GAAP), remained unchanged at 3.64 percent. Net interest margin is reconciled to net interest income adjusted to an FTE basis below in the "Net Interest Income" section of this MD&A. The provision for loan losses was $14.9 million for 2019 compared to $15.0 million in 2018. Net loan charge-offs increased $3.2 million to $13.6 million, or 0.22 percent of average loans, for 2019 compared to $10.4 million, or 0.18 percent of average loans, in 2018. Nonperforming loans increased $8.0 million and impaired loans increased $25.8 million with an increase in specific reserves of $0.4 million to $2.2 million compared to 2018. Total noninterest income increased $3.4 million to $52.6 million compared to $49.2 million in 2018. The increase in noninterest income primarily related to higher commercial loan swap income of $4.3 million compared to 2018 as we continue to see a high demand for this product in the current interest rate environment. Offsetting this increase was a $1.9 million gain on the sale of a majority interest in S&T Evergreen Insurance, LLC in 2018. Wealth management fees decreased $1.5 million compared to the prior year due to a decline in financial service revenue. Noninterest expense increased $21.7 million in part due to merger related expenses of $11.4 million in 2019, an increase of $7.9 million in salaries and employee benefits and an increase of $3.8 million in data processing and information technology. These expense increases were partially offset by a $2.8 million decrease in other taxes mainly due to a one-time adjustment related to a state sales tax assessment and a decrease of $2.5 million in FDIC insurance primarily due to Small Bank Assessment Credits that were received during 2019. The federal income tax provision decrease $1.3 million to $19.1 million in 2019 compared to $17.8 million in 2018. The increase in our 2019 income tax provision was mainly due to non-recurring items related to the tax benefit from the pension contribution in 2018 offset by the sale of a majority interest of our insurance business in 2018. 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. 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 44 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued securities using the federal statutory tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017. We believe this to be the preferred industry measurement of net interest income that provides a relevant comparison between taxable and non-taxable sources of interest income. The following table reconciles interest income per the Consolidated Statements of Net Income to net interest income and rates on an FTE basis for the periods presented: (dollars in thousands) Total interest income Total interest expense Net interest income per Consolidated Statements of Net Income Adjustment to FTE basis Net Interest Income (FTE) (non-GAAP) Net interest margin Adjustment to FTE basis Net Interest Margin (FTE) (non-GAAP) $ $ Years Ended December 31, 2019 2018 2017 $ $ 320,484 73,693 246,791 3,757 250,548 3.58 % 0.06 3.64 % $ $ 289,826 55,388 234,438 3,803 238,241 3.58 % 0.06 3.64 % 260,642 34,909 225,733 7,493 233,226 3.45 % 0.11 3.56 % 45 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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: 2019 2018 2017 Interest Rate Interest Rate Interest Rate $ $ $ (dollars in thousands) ASSETS Interest-bearing deposits with banks Securities, at fair value Loans held for sale (1)(2) Commercial real estate Commercial and industrial Commercial construction Total commercial loans Residential mortgage Home equity Installment and other consumer Consumer construction Total consumer loans (1)(2) Total portfolio loans Total Loans Federal Home Loan Bank and other restricted stock Total Interest-earning Assets Noninterest-earning assets Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand Money market Savings Certificates of deposit Total Interest-bearing deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Total borrowings Total Interest-bearing Liabilities Noninterest-bearing liabilities Shareholders’ equity Total Liabilities and Shareholders’ Equity $ (2)(3) Net Interest Income Net Interest Margin (2)(3) $ $ Average Balance 59,941 678,069 2,169 2,945,278 1,575,485 278,665 4,799,428 765,604 475,149 72,283 10,896 1,323,932 6,123,360 6,125,529 21,833 6,885,372 550,164 7,435,536 641,403 1,691,910 766,142 1,396,706 4,496,161 16,863 255,264 66,392 47,934 386,453 4,882,614 1,569,014 983,908 7,435,536 1,233 17,876 84 144,877 79,429 14,237 238,543 33,889 25,208 5,173 593 64,863 303,406 303,490 1,642 324,241 3,915 30,236 1,928 26,947 63,026 110 6,416 1,831 2,310 10,667 73,693 $ $ Average Balance 56,210 682,806 1,515 2,779,096 1,441,560 314,265 4,534,921 696,849 474,538 67,047 5,336 1,243,770 5,778,691 5,780,206 30,457 6,549,679 494,149 7,043,828 570,459 1,299,185 836,747 1,328,985 4,035,376 45,992 525,172 47,986 45,619 664,769 4,700,145 1,435,328 908,355 7,043,828 1,042 17,860 85 132,139 67,770 15,067 214,976 29,772 22,981 4,594 267 57,614 272,590 272,675 2,052 293,629 1,883 18,228 1,773 18,972 40,856 221 11,082 1,129 2,100 14,532 55,388 2.06 % $ 2.64 % 3.88 % 4.92 % 5.04 % 5.11 % 4.97 % 4.43 % 5.31 % 7.16 % 5.44 % 4.90 % 4.95 % 4.95 % 7.52 % 4.71 % $ 0.61 % $ 1.79 % 0.25 % 1.93 % 1.40 % 0.65 % 2.51 % 2.76 % 4.82 % 2.76 % 1.51 % $ 3.64 % $ $ Average Balance 56,344 698,460 14,607 2,638,766 1,425,421 426,574 4,490,761 699,843 484,023 69,163 4,631 1,257,660 5,748,421 5,763,028 31,989 6,549,821 510,411 7,060,232 637,526 994,783 988,504 1,439,711 4,060,524 46,662 644,864 18,057 45,619 755,202 4,815,726 1,372,376 872,130 7,060,232 578 17,320 581 114,484 61,976 17,384 193,844 28,741 20,866 4,521 201 54,329 248,173 248,754 1,483 268,135 1,418 7,853 2,081 13,978 25,330 54 7,399 463 1,663 9,579 34,909 1.85 % $ 2.62 % 5.60 % 4.75 % 4.70 % 4.79 % 4.74 % 4.27 % 4.84 % 6.85 % 5.00 % 4.63 % 4.72 % 4.72 % 6.74 % 4.48 % $ 0.33 % $ 1.40 % 0.21 % 1.43 % 1.01 % 0.48 % 2.11 % 2.35 % 4.60 % 2.19 % 1.18 % $ 3.64 % $ 250,548 $ 238,241 $ 233,226 1.03 % 2.48 % 3.98 % 4.34 % 4.35 % 4.08 % 4.32 % 4.11 % 4.31 % 6.54 % 4.35 % 4.32 % 4.32 % 4.32 % 4.64 % 4.09 % 0.22 % 0.79 % 0.21 % 0.97 % 0.62 % 0.12 % 1.15 % 2.57 % 3.65 % 1.27 % 0.72 % 3.56 % (1) (2) (3) Nonaccruing loans are included in the daily average loan amounts outstanding. Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017. Taxable investment income is adjusted for the dividend-received deduction for equity securities. 46 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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: (dollars in thousands) Interest earned on: Interest-bearing deposits with banks Securities, at fair value Loans held for sale (2)(3) Commercial real estate Commercial and industrial Commercial construction Total commercial loans Residential mortgage Home equity Installment and other consumer Consumer construction Total consumer loans (1)(2) Total portfolio loans Total loans Federal Home Loan Bank and other restricted stock Change in Interest Earned on Interest-earning Assets Interest paid on: Interest-bearing demand Money market Savings Certificates of deposit Total interest-bearing deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Total borrowings Change in Interest Paid on Interest-bearing Liabilities Change in Net Interest Income 2019 Compared to 2018 Increase (Decrease) Due to 2018 Compared to 2017 Increase (Decrease) Due to Volume (4) Rate (4) Net Volume (4) Rate (4) Net $ $ $ $ $ 69 $ (124) 37 7,902 6,296 (1,707) 12,491 2,937 30 359 278 3,604 16,095 16,132 (581) 15,496 $ 234 $ 5,510 (150) 967 6,561 (140) (5,696) 433 107 (5,296) 1,265 $ 14,231 $ 122 $ 140 (38) 4,836 5,363 877 11,076 1,180 2,197 220 48 3,645 14,721 14,683 171 15,116 $ 1,798 $ 6,498 305 7,008 15,609 29 1,030 269 103 1,431 17,040 $ (1,924) $ 191 16 (1) 12,738 11,659 (830) 23,567 4,117 2,227 579 326 7,249 30,816 30,815 (410) 30,612 2,032 12,008 155 7,975 22,170 (111) (4,666) 702 210 (3,865) 18,305 12,307 $ $ $ $ $ (1) $ (388) (521) 6,088 702 (4,577) 2,213 (123) (409) (138) 31 (639) 1,574 1,053 (71) 593 $ (149) $ 2,403 (319) (1,075) 860 (1) (1,373) 767 — (607) 253 $ 340 $ 465 $ 928 25 11,567 5,092 2,260 18,919 1,154 2,524 211 35 3,924 22,843 22,868 640 24,901 $ 614 $ 7,972 11 6,069 14,666 168 5,056 (101) 437 5,560 20,226 $ 4,675 $ 464 540 (496) 17,655 5,794 (2,317) 21,132 1,031 2,115 73 66 3,285 24,417 23,921 569 25,494 465 10,375 (308) 4,994 15,526 167 3,683 666 437 4,953 20,479 5,015 (1) (2) (3) (4) Nonaccruing loans are included in the daily average loan amounts outstanding. Tax-exempt income is on an FTE basis using the statutory federal corporate income tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017. Taxable investment income is adjusted for the dividend-received deduction for equity securities. 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 $12.3 million, or 5.2 percent, compared to 2018. The net interest margin on an FTE basis (non-GAAP) remained unchanged at 3.64 percent. Interest income on an FTE basis (non-GAAP) increased $30.6 million, or 10.4 percent, compared to 2018. The increase was primarily due to an increase in average interest-earning assets of $335.7 million and higher short-term interest rates compared to 2018. Average loan balances increased $345.3 million and the average rate earned on loans increased 23 basis points primarily due to higher average short-term interest rates. Average investment securities decreased $4.7 million and the average rate earned increased two basis points. Overall, the FTE rate on interest-earning assets (non-GAAP) increased 23 basis points compared to 2018. 47 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Interest expense increased $18.3 million compared to 2018. The increase was primarily due to an increase in costing liabilities of $182.5 million and higher average short-term interest rates. Average interest-bearing deposits increased $460.8 million. Average money market balances increased $392.7 million and the average rate paid increased 39 basis points due to higher average short-term interest rates and promotional pricing. Average non-interest bearing deposits also increased $99.6 million. Average borrowings decreased $278.3 million due to increased deposits and the average rate paid increased 57 basis points due to higher average short-term interest rates. Overall, the cost of interest-bearing liabilities increased 33 basis points compared to 2018. Provision for Loan Losses The provision for loan losses is the adjustment to the ALL after net loan charge-offs have been deducted to bring the ALL to a level determined to be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses was$14.9 million for 2019 compared to $15.0 million for 2018. Commercial special mention, substandard and doubtful loans decreased $11.6 million to $258.7 million compared to $270.3 million at December 31, 2018, with a decrease of $28.5 million in substandard loans offset by increases of $16.5 million in special mention loans and $0.4 million in doubtful loans. The decrease in substandard loans was mainly due to loan pay-offs and upgrades of risk ratings. Special mention loans increased due to upgrades from substandard and other downgrades as a result of updated financial information. Impaired loans increased $25.8 million to $75.3 million at December 31, 2019 compared to $49.5 million at December 31, 2018 with an increase in specific reserves of $0.4 million compared to December 31, 2018. The increase in specific reserves related to a new $5.4 million CRE impaired loan in the third quarter of 2019 that required a $0.8 million specific reserve at December 31, 2019. Other new significant impaired loans during 2019 did not require a specific reserve. Net charge-offs increased $3.2 million to $13.6 million, or 0.22 percent of average loans in 2019, compared to $10.4 million, or 0.18 percent of average loans in 2018. Total nonperforming loans increased $8.0 million to $54.1 million, or 0.76 percent of total loans at December 31, 2019, compared to $46.1 million, or 0.77 percent of total loans at December 31, 2018. The increase in nonperforming loans is primarily related to a $10.0 million C&I loan that moved to nonperforming, impaired during the fourth quarter of 2019. The ALL at December 31, 2019, was $62.2 million, or 0.87 percent of total portfolio loans, compared to $61.0 million, or 1.03 percent of total portfolio loans at December 31, 2018. The decrease in the level of ALL as a percent of total portfolio loans is due to the DNB merger which added $899.3 million of loans with no carry-over of ALL. Acquired loans are recorded at fair value at the time of merger. Refer to the Allowance for Loan Losses section of this MD&A for further details. Noninterest Income (dollars in thousands) Securities gains, net Service charges on deposit accounts Debit and credit card Wealth management Commercial loan swap income Insurance Mortgage banking Gain on sale of a majority interest of insurance business Other Income: Bank owned life insurance Letter of credit origination Other Total Other Noninterest Income Total Noninterest Income NM- percentage change not meaningful Years Ended December 31, $ $ 2019 (26) 13,316 13,405 8,623 5,503 355 2,491 — 1,971 1,058 5,862 8,891 $ 2018 — 13,096 12,679 10,084 1,225 505 2,762 1,873 2,041 1,064 3,852 6,957 $ 52,558 $ 49,181 $ $ Change (26) 220 726 (1,461) 4,278 (150) (271) (1,873) (70) (6) 2,010 1,934 3,377 % Change NM 1.7 % 5.7 % (14.5) % 349.2 % (29.7) % (9.8) % NM (3.4) % (0.6) % 52.2 % 27.8 % 6.9 % Noninterest income increased $3.4 million, or 6.9 percent, in 2019 compared to 2018. The increase in noninterest income primarily related to higher commercial loan swap income of $4.3 million compared to 2018 as we continue to see a high demand for this product in the current interest rate environment. The $1.9 million increase in other noninterest income was primarily attributable to a change in the valuation of our rabbi trust related to a deferred compensation plan, which has a 48 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued corresponding offset in salaries and benefit expense resulting in no impact to net income. Offsetting these increases was a $1.9 million gain on the sale of a majority interest in S&T Evergreen Insurance, LLC in 2018. Wealth management fees decreased $1.5 million due to a decline in financial service revenue. Debit and credit card fees increased $0.7 million compared to the prior year due to increased debit and credit card usage. Service charges on deposit accounts also increased $0.2 million due to increases in fees. Noninterest Expense (dollars in thousands) Salaries and employee benefits Data processing and information technology Net occupancy Merger-related expenses Furniture, equipment and software Marketing Professional services and legal Other taxes FDIC Insurance Other expenses: Loan related expenses Joint venture amortization Supplies Postage Amortization of intangibles Other Total Other Noninterest Expense Total Noninterest Expense $ $ 2019 83,986 14,468 12,103 11,350 8,958 4,631 4,244 3,364 758 3,250 2,648 1,159 1,082 836 14,279 23,254 Years Ended December 31, $ 2018 76,108 10,633 11,097 — 8,083 4,192 4,132 6,183 3,238 2,268 2,701 1,080 1,077 846 13,807 21,779 $ Change 7,878 3,835 1,006 11,350 875 439 112 (2,819) (2,480) 982 (53) 79 5 (10) 472 1,475 $ 167,116 $ 145,445 $ 21,671 % Change 10.4 % 36.1 % 9.1 % NM 10.8 % 10.5 % 2.7 % (45.6) % (76.6) % 43.3 % (2.0) % 7.3 % 0.5 % (1.2) % 3.4 % 6.8 % 14.9 % Noninterest expense increased $21.7 million, or 14.9 percent, to $167.1 million in 2019 compared to 2018. Total merger related expenses of $11.4 million were comprised of $4.7 million for data processing, $3.4 million of salaries and employee benefits, mainly related to severance payments, $2.8 million for professional services and $0.5 million in various other expenses. Salaries and employee benefits increased $7.9 million during 2019 primarily due to additional employees, annual merit increases, and higher pension and incentive expense. Data processing and information technology increased $3.8 million compared to 2018 due to the outsourcing agreement for certain components of our information technology function and the annual increase with our third-party data processor. These increases were partially offset by a $2.8 million decrease in other taxes due to a one-time adjustment related to a state sales tax assessment. FDIC insurance decreased $2.5 million related to Small Bank Assessment Credits that were received by all banking institutions with assets of less than $10 billion and improvements in our financial ratios which are used to determine the assessment. Our efficiency ratio (non-GAAP), which measures noninterest expense as a percent of noninterest income plus net interest income, on an FTE basis, excluding security gains/losses and $11.4 million of merger related expenses, was 51.39 percent for 2019 and 50.60 percent for 2018. Refer to Explanation of Use of Non-GAAP Financial Measures in Part II, Item 6 Selected Financial Data in this Report for a discussion of this non-GAAP financial measure. Federal Income Taxes The income tax provision increased $1.3 million to $19.1 million in 2019 compared to $17.8 million in 2018. The increase in our 2019 income tax provision was mainly due to non-recurring items related to the tax benefit from the pension contribution in 2018 offset by the sale of a majority interest of our insurance business in 2018. The effective tax rate, which is total tax expense as a percentage of net income before taxes, increased to 16.3 percent in 2019 compared to 14.5 percent in 2018. The increase in the effective tax rate was primarily due to lower net income before taxes in 2019 compared to 2018. Historically, we have generated an annual effective tax rate that is less than the statutory rate of 21 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on BOLI and tax benefits associated with Low Income Housing Tax Credits, or LIHTC. 49 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Financial Condition December 31, 2020 Total assets increased $203.2 million to $9.0 billion at December 31, 2020 compared to $8.8 billion at December 31, 2019. Total portfolio loans increased $88.7 million to $7.2 billion at December 31, 2020 compared to $7.1 billion at December 31, 2019. The increase in portfolio loans primarily related to growth in the commercial loan portfolio of $160.9 million with increases of $233.6 million in C&I, which included $465.5 million of loans from the PPP, and $98.8 million in commercial construction offset by a decrease of $171.5 million in the CRE portfolio compared to December 31, 2019. Excluding the PPP loans, portfolio loans decreased $376.8 million compared to December 31, 2019 due to decreased activity related to the COVID-19 pandemic. Consumer loans decreased $72.2 million compared to December 31, 2019 primarily due to a decrease in the residential mortgage portfolio of $80.2 million. Securities decreased $10.6 million to $773.7 million at December 31, 2020 from $784.3 million at December 31, 2019. The decrease in securities is primarily due to a reduction in overall investing activities mainly during the first half of the year due to the declining interest rate environment. These reductions were partially offset by increases in unrealized gains. The bond portfolio had an unrealized gain of $33.4 million at December 31, 2020 compared to $10.7 million at December 31, 2019 due to a decrease in interest rates. Our deposits increased $384.0 million, with total deposits of $7.4 billion at December 31, 2020 compared to $7.0 billion at December 31, 2019. Customer deposits increased $676.2 million from December 31, 2019. The increase in customer deposits primarily related to PPP and stimulus programs along with customers conservatively holding cash deposits during these uncertain times. Customer noninterest-bearing demand deposits increased $563.9 million, interest-bearing demand increased $102.4 million, money market deposits increased $37.4 million and savings increased $138.6 million offset by a decrease in certificates of deposit of $166.1 million. Total brokered deposits decreased $292.2 million from December 31, 2019 due to the customer deposit growth. Brokered deposits are an additional source of funds utilized by ALCO as a way to diversify funding sources, as well as manage our funding costs and structure. Total borrowings decreased $188.5 million to $227.9 million at December 31, 2020 compared to $416.4 million at December 31, 2019 due to an increase in deposits. The decrease in borrowings primarily related to a decline in short-term borrowings of $206.3 million offset by an increase in securities sold under repurchase agreements of $45.3 million due to demand for the product by our REPO customers. Total shareholders’ equity decreased by $37.3 million to $1.2 billion at December 31, 2020 compared to $1.2 billion at December 31, 2019. The decrease was primarily due to the previously disclosed fraud loss, net of tax, of $46.3 million that significantly decreased net income to $21.0 million for 2020. Net income was offset by decreases from the cumulative-effect adjustment related to the adoption of ASU 2016-13, Credit Losses, of $22.6 million, share repurchases of $12.6 million, and dividends of $43.9 million and increased by a $20.6 million increase in other comprehensive income. The increase in other comprehensive income was primarily due to a $18.0 million increase in unrealized gains on our available-for-sale securities, net of tax, and a $2.8 million change in the funded status of our employee benefit plans. Securities Activity The balances and average rates of our securities portfolio are presented below as of December 31: (dollars in thousands) U.S. Treasury securities Obligations of U.S. government corporations and agencies Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies Corporate securities Obligations of states and political subdivisions Marketable equity securities Total Securities (1) $ $ Balance 10,282 82,904 209,296 67,778 273,681 2,025 124,427 3,300 773,693 2020 2019 2018 Weighted- Average Yield 1.87 % $ 2.28 % 2.23 % 1.26 % 2.41 % 3.90 % 3.49 % 2.90 % 2.42 % $ Balance 10,040 157,697 189,348 22,418 275,870 7,627 116,133 5,150 784,283 Weighted- Average Yield 1.87 % $ 2.20 % 2.68 % 2.95 % 2.42 % 4.35 % 3.45 % 2.77 % 2.56 % $ Balance 9,736 128,261 148,659 24,350 246,784 — 122,266 4,816 684,872 Weighted- Average Yield 1.87 % 2.30 % 2.71 % 3.43 % 2.38 % — % 3.43 % 3.02 % 2.65 % (1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent for 2020, 2019 and 2018. 50 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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 decreased $10.6 million to $773.7 million at December 31, 2020 from $784.3 million at December 31, 2019. The decrease in securities is primarily due to a reduction in overall investing activities mainly during the first half of the year due to the declining interest rate environment. These reductions were partially offset by increases in unrealized gains. At December 31, 2020 our bond portfolio was in a net unrealized gain position of $33.4 million compared to a net unrealized gain position of $10.7 million at December 31, 2019. At December 31, 2020, total gross unrealized gains in the bond portfolio were $33.5 million compared to December 31, 2019, when total gross unrealized gains were $11.7 million offset by gross unrealized losses of $1.0 million. Management evaluates the securities portfolio to determine if an ACL is needed each quarter. We did not record an ACL related to the securities portfolio at December 31, 2020. 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, 2020. 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 2020, 2019 or 2018. The performance of the debt securities markets could generate impairments in future periods requiring realized losses to be reported. The following table sets forth the maturities of securities at December 31, 2020 and the weighted average yields of such securities. Taxable-equivalent adjustments for 2020 have been made in calculating yields on obligations of state and political subdivisions. (dollars in thousands) Available-for-Sale U.S. Treasury securities Obligations of U.S. government corporations and agencies Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies Obligations of states and political subdivisions Corporate Bonds Marketable equity securities Total (1) Within One Year After One But within Five Years Maturing After Five But Within Ten Years After Ten Years No Fixed Maturity Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield $ — — % $ 10,282 1.87 % $ 10,152 2.17 % 72,752 2.29 % — — — % $ — % — — — % $ — % — — — 30,854 18 — — % — % — % 3.90 % 8.25 % — % 13,947 2.51 % 89,887 2.80 % 105,462 1.71 % 744 5.06 % 5,400 2.70 % 61,634 1.09 % 190,345 26,009 499 — 2.47 % 3.25 % 3.42 % — % 83,336 43,765 1,508 — 2.28 % 3.51 % 4.01 % — % — 23,799 — — — 3.13 % — % — % $ 41,024 $ 314,578 $ 223,896 $ 190,895 $ — — — — — — — 3,300 3,300 — % —% —% —% —% — % —% 2.90 % 2.90 % Weighted Average Yield 3.47 % 2.48 % 2.75 % 1.69 % (1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent for 2020. 51 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Lending Activity The following table summarizes our loan portfolio as of December 31: (dollars in thousands) Commercial Commercial real estate Commercial and industrial Commercial construction Total Commercial Loans Consumer Residential mortgage Home equity Installment and other consumer Consumer construction Total Consumer Loans 2020 Amount 2019 2018 2017 2016 % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total $ 3,244,974 44.91 % $ 3,416,518 47.87 % $ 2,921,832 49.13 % $ 2,685,994 44.62 % $ 2,498,476 44.53 % 1,954,453 474,280 5,673,707 918,398 535,165 80,915 17,675 1,552,153 27.05 % 6.56 % 78.52 % 12.71 % 7.41 % 1.11 % 0.24 % 21.48 % 1,720,833 375,445 5,512,796 998,585 538,348 79,033 8,390 1,624,356 24.11 % 5.26 % 77.24 % 13.99 % 7.54 % 1.10 % 0.12 % 22.76 % 1,493,416 257,197 4,672,445 726,679 471,562 67,546 8,416 1,274,203 25.11 % 4.33 % 78.57 % 12.22 % 7.93 % 1.13 % 0.14 % 21.43 % 1,433,266 384,334 4,503,594 698,774 487,326 67,204 4,551 1,257,855 24.88 % 6.67 % 78.17 % 12.13 % 8.46 % 1.17 % 0.08 % 21.83 % 1,401,035 455,884 4,355,395 701,982 482,284 65,852 5,906 1,256,024 24.97 % 8.12 % 77.62 % 12.51 % 8.59 % 1.17 % 0.11 % 22.38 % Total Portfolio Loans $ 7,225,860 100.00 % $ 7,137,152 100.00 % $ 5,946,648 100.00 % $ 5,761,449 100.00 % $ 5,611,419 100.00 % 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. Total portfolio loans increased $88.7 million, or 1.2 percent, to $7.2 billion at December 31, 2020 compared to $7.1 billion at December 31, 2019. Commercial and industrial loans, or C&I, included $465.5 million of loans originated under the PPP at December 31, 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law. The CARES Act included the PPP, a program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted expenses in accordance with the requirements of the PPP. The loans are 100 percent guaranteed by the SBA. These loans carry a fixed rate of 1.00 percent and a term of two years, or five years for loans approved by the SBA, on or after June 5, 2020. Payments are deferred for at least six months of the loan. The SBA pays us a processing fee ranging from 1 percent to 5 percent based on the size of the loan. Interest is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income over the life of the loan using the level yield method. When a PPP loan is paid off or forgiven by the SBA, the remaining unaccreted or unamortized net origination fees or costs will be immediately recognized into income. Commercial loans, including CRE, C&I and commercial construction, comprised 78.5 percent of total portfolio loans at December 31, 2020 and 77.2 percent at December 31, 2019. The increase of $160.9 million in commercial loans related to $233.6 million in C&I, which included $465.5 million of loans from the PPP, and $98.8 million in commercial construction loans offset by a decrease of $171.5 million in CRE compared to December 31, 2019. Excluding the PPP loans, portfolio loans decreased $376.8 million compared to December 31, 2019 due to decreased activity related to the COVID-19 pandemic. Consumer loans represent 21.5 percent of our total portfolio loans at December 31, 2020 and 22.8 percent at December 31, 2019. Consumer loans decreased $72.2 million compared to December 31, 2019 with decreases of $80.2 million in residential mortgages and $3.2 million in home equity loans offset by increases in consumer construction of $9.3 million and installment and other consumer of $1.9 million. Residential mortgage lending continues to be a focus through a centralized mortgage origination department, secondary market activities and the utilization of commission compensated originators. Management believes that continued adherence to our conservative mortgage lending policies for portfolio mortgage loans will continue to be important. The LTV policy guideline is 80 percent for residential first lien mortgages. Higher LTV loans may be approved with the appropriate private mortgage insurance coverage. We primarily limit our fixed rate portfolio mortgage loans to a maximum term of 20 years for traditional mortgages, 30 year fixed rate construction 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 52 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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. During 2020 and 2019, we sold $345.1 million and $94.5 million of 1-4 family mortgages to Fannie Mae. Our servicing portfolio of mortgage loans that we had originated and sold into the secondary market was $718.2 million at December 31, 2020 compared to $509.2 million at December 31, 2019. We also offer a variety of unsecured and secured consumer loan products. LTV guidelines for direct loans are generally 90-100 percent of invoice for new automobiles and 80-90 percent of National Automobile Dealer Association value for used automobiles. The following table presents the maturity of commercial and consumer loans outstanding as of December 31, 2020: (dollars in thousands) Fixed interest rates Variable interest rates Total Commercial Loans Fixed interest rates Variable interest rates Total Consumer Loans Total Portfolio Loans Credit Quality Maturity Within One Year 593,709 784,722 1,378,431 65,145 462,809 527,954 1,906,385 $ $ $ $ $ $ $ $ After One But Within Five Years 790,383 1,549,532 2,339,915 After Five Years 401,829 $ 1,553,533 1,955,362 $ 190,800 111,106 301,906 2,641,821 $ $ 279,026 443,266 722,292 2,677,654 Total 1,785,921 3,887,787 5,673,708 534,971 1,017,181 1,552,152 7,225,860 $ $ $ $ On a quarterly basis, a criticized asset meeting is held to monitor all special mention and substandard loans greater than $1.5 million. These loans typically represent the highest risk of loss to us. Action plans are established and these loans are monitored 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 and update 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 a review of all commercial loans greater than $1.5 million. Commercial loans less than $1.5 million are monitored through portfolio management software that identifies credit risk indicators. Our Loan 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 Loan 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. 53 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Nonperforming assets, or NPAs, consist of nonaccrual loans, nonaccrual TDRs and OREO. The following represents NPAs as of December 31: (dollars in thousands) Nonperforming Loans Commercial real estate Commercial and industrial Commercial construction Residential mortgage Home equity Installment and other consumer Consumer construction Total Nonperforming Loans Nonperforming Troubled Debt Restructurings Commercial real estate Commercial and industrial Commercial construction Residential mortgage Home Equity Installment and other consumer Total Nonperforming Troubled Debt Restructurings Total Nonperforming Loans OREO Total Nonperforming Assets 2020 2019 2018 2017 2016 $ $ 87,951 13,430 384 11,567 4,057 96 — 117,485 17,062 9,907 — 1,441 879 — 29,289 146,774 2,155 148,929 $ $ 22,427 13,287 737 6,697 1,961 36 — 45,145 6,713 695 — 822 678 4 8,912 54,057 3,525 57,582 $ $ 11,085 5,763 11,780 3,543 2,719 33 — 34,923 967 3,197 2,413 3,585 979 9 11,150 46,073 3,092 49,165 $ $ 2,501 2,449 1,460 3,580 2,736 62 — 12,788 646 4,493 430 5,068 954 7 11,598 24,386 469 24,855 $ $ 15,526 3,578 4,497 4,850 2,485 101 — 31,037 3,548 1,570 1,265 665 523 88 7,659 38,696 679 39,375 Nonperforming loans as a percent of total loans Nonperforming assets as a percent of total loans plus OREO 2.03 % 2.06 % 0.76 % 0.81 % 0.77 % 0.83 % 0.42 % 0.42 % 0.76 % 0.77 % 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. We had $0.5 million of loans 90 days or more past due and still accruing at December 31, 2020 related to the DNB merger and $3.8 million of loans 90 days or more past due and still accruing at December 31, 2019. The DNB merger loans were recorded at fair value at the time of acquisition. Nonperforming loans increased $92.7 million to $146.8 million at December 31, 2020 compared to $54.1 million at December 31, 2019. The significant increase in nonperforming loans primarily related to the addition of $56.3 million of hotel loans which moved to nonperforming during the fourth quarter of 2020 as a result of continued deterioration due to the COVID-19 pandemic. Also moving to nonperforming during 2020 were $11.3 million and $6.7 million CRE relationships, which experienced financial deterioration that led to cash flow shortfalls, a $5.9 million CRE relationship, which was associated with the customer fraud and a $15.1 million C&I relationship, which experienced financial deterioration that led to cash flow shortfalls. The $11.3 million CRE relationship became a performing TDR in the third quarter of 2019. The relationship then moved to nonperforming in the first quarter of 2020 when the borrower experienced financial deterioration that led to cash flow issues. TDRs are loans where we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise grant. We strive to identify borrowers in financial difficulty early and work with them to modify the terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 bankruptcy and not reaffirmed by the borrower as TDRs. An accruing loan that is modified into a TDR can remain in accrual status if, based on a current credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured and the borrower has demonstrated sustained historical repayment performance for a reasonable period before the modification. All commercial TDRs are individually evaluated and all consumer TDRs are reserved for at the pool level based on their similar risk characteristics. For all commercial TDRs, regardless of size, we conduct further analysis to determine the loss and assign a specific reserve to the loan if deemed appropriate. TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, 54 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring. As an example, consider a substandard commercial construction loan that is currently 90 days past due where the loan is restructured to extend the maturity date for a period longer than would be considered an insignificant period of time. The post-modification interest rate given to the borrower is considered to be lower than the current market rate for new debt with similar risk and all other terms remain the same according to the original loan agreement. This loan will be considered a TDR as the borrower is experiencing financial difficulty and a concession has been granted due to the long extension of the maturity date, resulting in payment delay as well as the rate being lower than the current market rate for new debt with similar risk. The loan will be reported as nonaccrual TDR and will be individually evaluated. In addition, the loan could be charged down to the fair value of the collateral if a confirmed loss exists. If the loan subsequently performs, by means of making on-time principal and interest payments according to the newly restructured terms for a period of six months, and it is expected that all remaining principal and interest will be collected according to the terms of the restructured agreement, the loan will be returned to accrual status and reported as an accruing TDR. TDRs increased $0.8 million to $46.7 million at December 31, 2020 compared to $45.9 million at December 31, 2019. Total TDRs of $46.7 million at December 31, 2020 included $17.4 million, or 37.3 percent, that were performing and $29.3 million, or 62.7 percent, that were not performing. This is an increase from December 31, 2019 when we had $45.9 million in TDRs, including $37.0 million that were performing and $8.9 million that were nonperforming. The significant increase in nonperforming TDRs during 2020 primarily related to an $11.3 million CRE relationship that moved to nonperforming in the first quarter of 2020 due to financial deterioration that led to cash flow shortfalls. The loan was modified to reduce monthly payments and became a TDR during the third quarter of 2019. During the third quarter of 2020, $10.1 million was charged-off when the customer notified the bank they planned to cease operations. The increase in nonperforming TDRs during 2020 was also attributed to the addition of a $9.6 million C&I loan that was modified during the fourth quarter of 2020. The modification granted a concession to the borrower that resulted in a payment delay. Loan modifications resulting in new TDRs during 2020 included 40 modifications for $22.7 million compared to 53 modifications for $32.2 million of new TDRs in 2019. Included in the 2020 new TDRs were 23 loans totaling $1.0 million related to consumer bankruptcy filings that were not reaffirmed, thus resulting in discharged debt, which compares to 36 loans totaling $1.1 million in 2019. 55 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The following represents delinquency as of December 31: (dollars in thousands) 90 days or more: Commercial real estate Commercial and Industrial Commercial construction Residential mortgage Home equity Installment and other consumer Consumer construction Total Loans 30 to 89 days: Commercial real estate Commercial and industrial Commercial construction Residential mortgage Home equity Installment and other consumer Consumer construction Loans held for sale Total Loans 2020 Amount 105,014 23,337 384 13,008 4,935 96 — 146,774 415 1,161 3,641 2,156 1,274 205 — — 8,852 $ % of Loans 3.24 % 1.19 % 0.08 % 1.42 % 0.92 % 0.12 % — % 2.03 % $ $ 0.01 % 0.04 % 0.01 % 0.05 % 0.18 % 0.21 % — % — % 0.12 % $ $ $ $ $ 2019 Amount 29,140 13,982 737 7,519 2,639 40 — 54,057 10,311 4,886 2,119 3,743 2,200 718 — — 23,977 $ % of Loans 0.85 % 0.81 % 0.20 % 0.75 % 0.49 % 0.05 % — % 0.76 % $ $ 0.28 % 0.17 % 0.25 % 0.20 % 0.38 % 0.54 % — % — % 0.34 % $ 2018 Amount 12,052 8,960 14,193 7,128 3,698 42 — 46,073 5,783 1,983 — 2,104 2,712 223 — — 12,805 $ % of Loans 0.41 % 0.60 % 5.52 % 0.98 % 0.78 % 0.06 % — % 0.77 % $ $ 0.20 % 0.13 % — % 0.29 % 0.58 % 0.33 % — % — % 0.22 % $ 2017 Amount 3,468 5,646 3,873 7,165 3,715 71 — 23,938 1,131 866 2,493 4,414 2,655 363 — — 11,922 $ % of Loans 0.13 % 0.39 % 1.01 % 1.03 % 0.76 % 0.11 % — % 0.42 % $ $ 0.04 % 0.06 % 0.65 % 0.63 % 0.54 % 0.54 % — % — % 0.21 % $ 2016 Amount 16,172 8,071 4,927 9,918 3,439 108 — 42,635 2,791 1,488 547 2,429 1,979 220 — — 9,454 % of Loans 0.65 % 0.58 % 1.08 % 1.41 % 0.71 % 0.16 % — % 0.74 % 0.11 % 0.11 % 0.12 % 0.35 % 0.41 % 0.33 % — % — % 0.16 % 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 increased $92.7 million compared to December 31, 2019 and represented 2.03 percent of total loans at December 31, 2020. The change in loans past due 90 days or more is explained above. Loans past due by 30 to 89 days decreased $15.1 million and represented 0.12 percent of total loans at December 31, 2020. 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 becomes probable, 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. 56 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The following summarizes our loan charge-off experience for each of the four years presented below: (dollars in thousands) ACL Balance at Beginning of Year: Charge-offs: Commercial and industrial Commercial construction Consumer real estate Other consumer Total Recoveries: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total Net Charge-offs Impact of CECL adoption Provision for credit losses ACL Balance at End of Year: (1) Represents ALL for year presented Years Ended December 31, 2020 62,224 $ $ (1) 2019 60,996 $ (1) 2018 56,390 $ (27,512) (75,408) (454) (1,101) (1,890) (106,365) 348 1,733 183 233 489 2,986 (103,379) 27,346 131,421 117,612 $ $ (3,664) (8,928) (406) (1,353) (1,838) (16,189) 137 1,388 5 637 377 2,544 (13,645) — 14,873 62,224 $ (372) (8,574) (2,630) (1,319) (1,694) (14,589) 309 1,723 1,135 541 492 4,200 (10,389) — 14,995 60,996 $ (1) 2017 52,775 (2,304) (4,709) (2,571) (2,274) (1,638) (13,496) 810 654 851 342 571 3,228 (10,268) — 13,883 56,390 Net loan charge-offs for 2020 were $103.4 million, or 1.40 percent of average loans, compared to $13.6 million, or 0.22 percent of average loans for 2019. In addition to the $58.7 million charge-off from the customer fraud and the $8.9 million loan charge-off for the lending relationship with this customer, the most significant charge-offs during 2020 were a $10.1 million CRE relationship and a $9.9 million C&I relationship that occurred in the first quarter of 2020. We obtained information on the C&I relationship subsequent to filing our Annual Report on Form 10-K for the year ended December 31, 2019 but before the end of the first quarter of 2020; therefore, we recorded a $9.9 million specific reserve in the day one CECL adjustment. The updated information supported a loss existed at January 1, 2020. The following table summarizes net charge-offs as a percentage of average loans for the years presented: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Net charge-offs to average loans outstanding Allowance for credit losses as a percentage of total portfolio loans Allowance for credit losses as a percentage of total portfolio loans excluding PPP Allowance for credit losses to total nonperforming loans Provision for credit losses as a percentage of net loan charge-offs NM - percentage not meaningful 2020 0.81 % 3.65 % 0.06 % 0.06 % 1.75 % 1.40 % 1.63 % 1.74 % 80 % 127 % 57 2019 0.10 % 0.44 % 0.11 % 0.05 % 1.85 % 0.22 % 0.87 % — % 115 % 109 % 2018 NM 0.48 % 0.48 % 0.07 % 1.79 % 0.18 % 1.03 % — % 132 % 144 % 2017 0.06 % 0.28 % 0.40 % 0.16 % 1.54 % 0.18 % 0.98 % — % 236 % 135 % 2016 0.10 % 0.45 % 0.46 % 0.11 % 2.69 % 0.25 % 0.94 % — % 124 % 135 % Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued The following is the ACL balance by portfolio segment as of December 31: 2020 2019 2018 2017 2016 (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Business banking Consumer real estate Other consumer Total $ Amount 65,656 16,100 7,239 15,917 10,014 2,686 117,612 % of Total 56 % 14 % 6 % 14 % 9 % 2 % 100 % $ Amount 30,577 15,681 7,900 6,337 1,729 62,224 % of Total 49 % 25 % 13 % 10 % 3 % 100 % $ Amount 33,707 11,596 7,983 6,187 1,523 60,996 % of Total 55 % 19 % 13 % 10 % 3 % 100 % $ Amount 27,235 8,966 13,167 5,479 1,543 56,390 % of Total 48 % 16 % 23 % 10 % 3 % 100 % $ Amount 19,976 10,810 13,999 6,095 1,895 52,775 % of Total 38 % 20 % 26 % 12 % 4 % 100 % 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 following table summarizes the ACL balance as of December 31: (dollars in thousands) Collectively Evaluated Individually Evaluated Total Allowance for Credit Losses 2020 104,048 13,564 117,612 $ $ $ $ 2019 60,024 2,200 62,224 $ $ 2018 59,233 1,763 60,996 $ $ 2017 56,313 77 56,390 $ $ 2016 51,977 798 52,775 The ACL was $117.6 million, or 1.63 percent of total portfolio loans, at December 31, 2020 compared to $62.2 million, or 0.87 percent of total portfolio loans, at December 31, 2019. The increase in the ACL of $55.4 million was primarily due to a $44.1 million increase in the reserve for loans collectively evaluated and an increase of $11.3 million in specific reserves for loans individually evaluated at December 31, 2020 compared to December 31, 2019. The significant increase in the ACL during the year was mainly due to the impact of the COVID-19 pandemic and our adoption of CECL on January 1, 2020. The adoption of CECL resulted in an increase to our ACL of $27.3 million on January 1, 2020. The increase included $8.2 million for S&T legacy loans and $9.3 million for acquired loans from the DNB merger. We also recorded a day one adjustment of $9.9 million primarily related to the C&I relationship that was charged off in the first quarter of 2020. We obtained information on this relationship subsequent to filing our Annual Report on Form 10-K for the year ended December 31, 2019 but before the end of the first quarter of 2020. The updated information supported a loss existed at January 1, 2020. Federal Home Loan Bank and Other Restricted Stock At December 31, 2020 and 2019, we held FHLB of Pittsburgh stock of $12.0 million and $21.9 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, 2020. The FHLB exceeds all required capital ratios. Additionally, we considered that the FHLB has been paying dividends and actively redeeming stock throughout 2020 and 2019. Accordingly, we believe sufficient evidence exists to conclude that no impairment existed at December 31, 2020. 58 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Deposits The following table presents the composition of deposits at December 31: (dollars in thousands) Customer deposits Noninterest-bearing demand Interest-bearing demand Money market Savings Certificates of deposit Total customer deposits Brokered deposits Interest-bearing demand Money market Certificates of deposit Total brokered deposits Total Deposits 2020 2019 $ Change $ $ 2,261,994 864,510 1,887,051 969,508 1,369,239 7,352,302 — 50,012 18,224 68,236 $ 1,698,082 762,111 1,849,684 830,919 1,535,305 6,676,101 200,220 100,127 60,128 360,475 $ 7,420,538 $ 7,036,576 $ 563,912 102,399 37,367 138,589 (166,066) 676,201 (200,220) (50,115) (41,904) (292,239) 383,962 Deposits are our primary source of funds. We believe that our deposit base is stable and that we have the ability to attract new deposits. Total deposits at December 31, 2020 increased $384.0 million, or 5.5 percent, from December 31, 2019. Total customer deposits at December 31, 2020 increased $676.2 million. The increase in customer deposits primarily related to PPP and stimulus programs along with customers conservatively holding cash deposits during these uncertain times. 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: 2018 2020 2019 (dollars in thousands) Noninterest-bearing demand Interest-bearing demand Money market Savings Certificates of deposit Brokered deposits Total Amount 2,072,310 844,331 1,960,741 899,717 1,482,127 232,384 7,491,610 $ $ Rate 0.19 % 0.57 % 0.11 % 1.34 % 1.02 % 0.48 % $ $ Amount 1,475,960 561,756 1,474,841 766,142 1,322,643 370,779 5,972,121 Rate 0.41 % 1.69 % 0.25 % 1.91 % 2.32 % 1.06 % $ $ Amount 1,376,329 565,273 1,040,214 836,747 1,202,781 390,360 5,411,704 Rate 0.31 % 1.24 % 0.21 % 1.37 % 2.05 % 0.76 % CDs of $100,000 and over accounted for 9.3 percent of total deposits at December 31, 2020 and 12.6 percent of total deposits at December 31, 2019 and primarily represent deposit relationships with local customers in our market area. Maturities of CDs of $100,000 or more outstanding at December 31, 2020 are summarized as follows: (dollars in thousands) Three months or less Over three through six months Over six through twelve months Over twelve months Total Borrowings The following table represents the composition of borrowings for the years ended December 31: 59 2020 276,548 207,059 135,482 69,089 688,178 $ $ Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued (dollars in thousands) Securities sold under repurchase agreements, retail Short-term borrowings Long-term borrowings Junior subordinated debt securities Total Borrowings 2020 65,163 75,000 23,681 64,083 227,927 $ $ 2019 19,888 281,319 50,868 64,277 416,352 $ $ $ Change 45,275 (206,319) (27,187) (194) (188,425) $ $ Borrowings are an additional source of funding for us. Securities sold under repurchase agreements are with our retail customers. Securities pledged as collateral under these arrangements cannot be sold or repledged by the secured party and are therefore accounted for as a secured borrowing. Short-term borrowings are comprised of FHLB advances with terms of one year and under. Long-term borrowings are for terms greater than one year and consist primarily of FHLB advances. FHLB advances are for various terms and are secured by a blanket lien on eligible real estate secured loans. At December 31, 2020, long-term borrowings decreased $27.2 million compared to December 31, 2019. Short-term borrowings decreased $206.3 million as compared to December 31, 2019 primarily due to increased deposits. At December 31, 2020, our long-term borrowings outstanding of $23.7 million included $20.6 million that were at a fixed rate and $3.1 million at a variable rate. Information pertaining to short-term borrowings is summarized in the tables below: (dollars in thousands) Balance at December 31 Average balance during the year Average interest rate during the year Maximum month-end balance during the year Average interest rate at December 31 (dollars in thousands) Balance at December 31 Average balance during the year Average interest rate during the year Maximum month-end balance during the year Average interest rate at December 31 Information pertaining to long-term borrowings is summarized in the tables below: (dollars in thousands) Balance at December 31 Average balance during the year Average interest rate during the year Maximum month-end balance during the year Average interest rate at December 31 (dollars in thousands) Balance at December 31 Average balance during the year Average interest rate during the year Maximum month-end balance during the year Average interest rate at December 31 60 Securities Sold Under Repurchase Agreements 2020 65,163 57,673 0.29 % 92,159 0.25 % $ $ $ 2019 19,888 16,863 0.65 % 23,427 0.74 % Short-Term Borrowings 2020 75,000 155,753 0.92 % 410,240 0.19 % $ $ $ 2019 281,319 255,264 2.51 % 425,000 1.84 % Long-Term Borrowings 2020 23,681 47,953 — 50,635 2.03 % $ $ $ $ 2019 50,868 66,392 — 70,418 2.61 % $ $ $ $ $ $ $ $ $ $ Junior Subordinated Debt Securities 2020 2019 64,083 64,092 3.57 % 64,848 3.01 % $ $ $ 64,277 47,934 4.82 % 64,277 4.42 % $ $ $ 2018 18,383 45,992 0.48 % 54,579 0.46 % 2018 470,000 525,172 2.11 % 690,000 2.65 % 2018 70,314 47,986 — 70,314 2.84 % 2018 45,619 45,619 3.65 % 45,619 5.25 % $ $ $ $ $ $ $ $ $ $ $ $ Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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 17 Short-Term Borrowings and Note 18 Long-Term Borrowings and Subordinated Debt to the Consolidated Financial Statements included in Part II, Item 8, of this Report, for more details. Wealth Management Assets As of December 31, 2020, the fair value of the S&T Bank Wealth Management assets under administration, which are not accounted for as part of our assets, increased to $2.1 billion from $2.0 billion as of December 31, 2019. Assets under administration consisted of $1.2 billion in S&T Trust, $0.7 billion in S&T Financial Services and $0.2 billion in Stewart Capital Advisors. Capital Resources Shareholders’ equity decreased $37.3 million, or 3.1 percent, to $1.2 billion at December 31, 2020 compared to $1.2 billion at December 31, 2019. The decrease was primarily due to the previously disclosed fraud loss, net of tax, of $46.3 million, the cumulative-effect adjustment related to the adoption of ASU 2016-13, Credit Losses, of $22.6 million, share repurchases of $12.6 million and dividends of $43.9 million, offset by a $20.6 million increase in other comprehensive income. The increase in other comprehensive income was due to a $17.8 million increase in unrealized gains on our available-for-sale securities, net of tax, and a $2.8 million change in the funded status of our employee benefit plan. We continue to maintain our capital position with a leverage ratio of 9.43 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 11.33 percent compared to the regulatory guideline of 6.50 percent to be well-capitalized. Our risk-based Tier 1 and Total capital ratios were 11.74 percent and 13.44 percent, which places us above the federal bank regulatory agencies’ well- capitalized guidelines of 8.00 percent and 10.00 percent, respectively. 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 (which were agreements reached in July 2010 by the international oversight body of the Basel Committee on Banking Supervision to require more and higher-quality capital) and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. The final rule established a comprehensive capital framework and went into effect on January 1, 2015 for smaller banking organizations such as S&T and S&T Bank. The rule also 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 beginning in 2019. The capital conservation buffer is scheduled to phase in over several years. The capital conservation buffer was 0.25 percent in 2016, 0.50 percent in 2017, 0.75 percent in 2018 and increased to 1.00 percent in 2019 and beyond. As a result, starting in 2019, a banking organization 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. Now that the new rule is fully phased in, 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 61 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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, 2020, we had not issued any securities pursuant to the shelf registration statement. 62 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Contractual Obligations Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude contingent contractual liabilities for which we cannot reasonably predict future payments. We have various financial obligations, including contractual obligations and commitments that may require future cash payments. The following table presents as of December 31, 2020 significant fixed and determinable contractual obligations to third parties by payment date: (1) (1) (dollars in thousands) Deposits without a stated maturity Certificates of deposit Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Operating and capital leases Purchase obligations Total (1) (1) (1) (1) 2021 6,033,075 1,182,938 65,163 75,000 1,251 — 5,058 20,643 7,383,128 $ $ 2022-2023 — 150,421 — — 8,153 — 9,968 38,141 206,683 $ $ $ Payments Due In 2024-2025 — 50,564 — — 13,461 — 9,801 42,619 116,445 $ Later Years — 3,540 — — 816 64,083 67,554 — 135,993 $ $ $ $ Total 6,033,075 1,387,463 65,163 75,000 23,681 64,083 92,381 101,403 7,842,249 (1) Excludes interest Operating lease obligations represent short and long-term lease arrangements as described in Note 11 Premises and Equipment, to the Consolidated Financial Statements included in Part II, Item 8 of this Report. Purchase obligations primarily represent obligations under agreement with our third party data processing servicer and communications charges as described in Note 19 Commitments and Contingencies, to the Consolidated Financial Statements included in Part II, Item 8 of this Report. 63 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued 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 the commitments and letters of credit as of December 31: (dollars in thousands) Commitments to extend credit Standby letters of credit Total 2020 2,185,752 89,095 2,274,847 $ $ 2019 1,910,805 80,040 1,990,845 $ $ Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Our allowance for unfunded commitments is determined using a methodology similar to that used to determine the ACL. The balance in the allowance for unfunded commitments increased $1.4 million to $4.5 million at December 31, 2020 compared to $3.1 million at December 31, 2019. The increase in the reserve for unfunded commitments at December 31, 2020 was primarily related to the adoption of ASU 2016-13 on January 1, 2020. 64 Table of Contents Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Liquidity Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. This includes the ability to satisfy the financial needs of depositors who want to withdraw funds or of borrowers needing to access funds to meet their credit needs. In order to manage liquidity risk, our Board of Directors has delegated authority to ALCO for the formulation, implementation and oversight of liquidity risk management for S&T. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position. Our primary funding and liquidity source is a stable customer deposit base. We believe S&T has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile sources. Refer to the Deposits section of this MD&A for additional discussion on deposits. Although deposits are the primary source of funds, we have identified various other funding sources that can be used as part of our normal funding program when either a structure or cost efficiency has been identified. Additional funding sources accessible to S&T include borrowing availability at the FHLB of Pittsburgh, federal funds lines with other financial institutions, the brokered deposit market and borrowing availability through the Federal Reserve Borrower-In-Custody program. An important component of our ability to effectively respond to potential liquidity stress events is maintaining a cushion of highly liquid assets. Highly liquid assets are those that can be converted to cash quickly, with little or no loss in value, to meet financial obligations. ALCO policy guidelines define a ratio of highly liquid assets to total assets by graduated risk tolerance levels of minimal, moderate and high. At December 31, 2020, we had $639.4 million in highly liquid assets, which consisted of $158.7 million in interest-bearing deposits with banks, $462.1 million in unpledged securities and $18.5 million in loans held for sale. This resulted in a highly liquid assets to total assets ratio of 7.1 percent at December 31, 2020. Also, at December 31, 2020, we had a remaining borrowing availability of $2.5 billion with the FHLB of Pittsburgh. Refer to Note 17 Short-Term Borrowings and Note 18 Long-Term Borrowings and Subordinated Debt to the Consolidated Financial Statements included in Part II, Item 8, of this Report, and the Borrowings section of this MD&A, for more details. 65 Inflation Management is aware of the significant effect inflation has on interest rates and can have on financial performance. 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. 66 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is defined as the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can adversely affect a financial institution’s earnings or capital. For most financial institutions, including S&T, market risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes also affect capital by changing the net present value of a bank’s future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancing shareholder value. However, excessive interest rate risk can threaten a bank’s earnings, capital, liquidity and solvency. Our sensitivity to changes in interest rate movements is continually monitored by the ALCO. The ALCO monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analyses and by performing stress tests and simulations to mitigate earnings and market value fluctuations due to changes in interest rates. Rate shock analyses results are compared to a base case to provide an estimate of the impact that market rate changes may have on 12 and 24 months of pretax net interest income. The base case and rate shock analyses are performed on a static balance sheet. A static balance sheet is a no growth balance sheet in which all maturing and/or repricing cash flows are reinvested in the same product at the existing product spread. Rate shock analyses assume an immediate parallel shift in market interest rates and include management assumptions regarding the impact of interest rate changes on non-maturity deposit products (noninterest-bearing demand, interest-bearing demand, money market and savings) and changes in the prepayment behavior of loans and securities with optionality. S&T policy guidelines limit the change in pretax net interest income over 12- and 24-month horizons using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percentage change in pretax net interest income by graduated risk tolerance levels of minimal, moderate, and high. We have temporarily suspended the analyses on downward rate shocks of 200 basis points or more because they do not provide meaningful insight into our interest rate risk position. In order to monitor interest rate risk beyond the 24-month time horizon of rate shocks on pretax net interest income, we also perform EVE analyses. EVE represents the present value of all asset cash flows minus the present value of all liability cash flows. EVE change results are compared to a base case to determine the impact that market rate changes may have on our EVE. As with rate shock analyses on pretax net interest income, EVE analyses incorporate management assumptions regarding prepayment behavior of fixed rate loans and securities with optionality and the behavior and value of non- maturity deposit products. S&T policy guidelines limit the change in EVE using rate shocks in increments of +/- 100 basis points. Policy guidelines define the percent change in EVE by graduated risk tolerance levels of minimal, moderate, and high. We have also temporarily suspended the downward rate shocks of 200 basis points or more for EVE. The table below reflects the rate shock analyses results for the 1 to 12 and 13 to 24 month periods of pretax net interest income and EVE. All results are in the minimal risk tolerance level. Change in Interest Rate (basis points) 400 300 200 100 (100) 1 - 12 Months % Change in Pretax Net Interest Income 15.8 % 11.7 7.7 4.4 (2.8) December 31, 2020 13 - 24 Months % Change in Pretax Net Interest Income % Change in EVE 28.5 % 28.5 % 29.0 21.3 25.6 14.3 17.7 8.0 (28.2) (5.7) 1 - 12 Months % Change in Pretax Net Interest Income 9.6 % 7.2 5.0 2.7 (4.3) December 31, 2019 13 - 24 Months % Change in Pretax Net Interest Income % Change in EVE (1.8)% 14.4 % 2.8 10.8 5.5 7.6 5.1 4.2 (10.8) (6.4) The results from the rate shock analyses on net interest income are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means more assets than liabilities will reprice during the measured time frames. The implications of an asset sensitive balance sheet will differ depending upon the change in market interest rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, more assets than liabilities will decrease in rate. This situation could result in a decrease in net interest income and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in net interest income and operating income. Our rate shock analyses show an improvement in the percentage change in pretax net interest income in the 1-12 month and 13-24 month rates up and rates down scenarios when comparing December 31, 2020 to December 31, 2019. Our EVE analyses show an improvement in the percentage change in EVE in the rates up scenarios and a decline in the rates down scenario when comparing December 31, 2020 to December 31, 2019. The EVE decline is due to the low interest rate environment, which negatively impacts the value of our non-maturity deposits. 67 Table of Contents Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued In addition to rate shocks and EVE analyses, we perform a market risk stress test at least annually. The market risk stress test includes sensitivity analyses and simulations. Sensitivity analyses are performed to help us identify which model assumptions cause the greatest impact on pretax net interest income. Sensitivity analyses may include changing prepayment behavior of loans and securities with optionality and the impact of interest rate changes on non-maturity deposit products. Simulation analyses may include the potential impact of rate changes other than the policy guidelines, yield curve shape changes, significant balance mix changes, and various growth scenarios. 68 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements Consolidated Balance Sheets Consolidated Statements of Net Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements 69 70 71 72 73 74 76 140 138 CONSOLIDATED BALANCE SHEETS S&T Bancorp, Inc. and Subsidiaries (in thousands, except share and per share data) ASSETS Cash and due from banks, including interest-bearing deposits of $158,903 and $124,491 at December 31, 2020 and 2019 Securities, at fair value Loans held for sale Portfolio loans, net of unearned income Allowance for credit losses Portfolio loans, net Bank owned life insurance Premises and equipment, net Federal Home Loan Bank and other restricted stock, at cost Goodwill Other intangible assets, net Other assets Total Assets LIABILITIES Deposits: Noninterest-bearing demand Interest-bearing demand Money market Savings Certificates of deposit Total Deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Other liabilities Total Liabilities SHAREHOLDERS’ EQUITY Common stock ($2.50 par value) Authorized—50,000,000 shares Issued—41,449,444 shares at December 31, 2020 and 2019 Outstanding—39,298,007 shares at December 31, 2020 and 39,560,304 shares at December 31, 2019 Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock—2,151,437 shares at December 31, 2020 and 1,889,140 shares at December 31, 2019, at cost Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity See Notes to Consolidated Financial Statements 70 December 31, 2020 2019 $ $ $ $ 229,666 773,693 18,528 7,225,860 (117,612) 7,108,248 82,303 55,614 13,030 373,424 8,675 304,716 8,967,897 2,261,994 864,510 1,937,063 969,508 1,387,463 7,420,538 65,163 75,000 23,681 64,083 164,721 7,813,186 103,623 400,668 710,061 8,971 (68,612) 1,154,711 8,967,897 $ $ $ $ 197,823 784,283 5,256 7,137,152 (62,224) 7,074,928 80,473 56,940 22,977 371,621 10,919 159,429 8,764,649 1,698,082 962,331 1,949,811 830,919 1,595,433 7,036,576 19,888 281,319 50,868 64,277 119,723 7,572,651 103,623 399,944 761,083 (11,670) (60,982) 1,191,998 8,764,649 CONSOLIDATED STATEMENTS OF NET INCOME S&T Bancorp, Inc. and Subsidiaries (dollars in thousands, except per share data) INTEREST AND DIVIDEND INCOME Loans, including fees Investment securities: Taxable Tax-exempt Dividends Total Interest and Dividend Income INTEREST EXPENSE Deposits Borrowings and junior subordinated debt securities Total Interest Expense NET INTEREST INCOME Provision for credit losses Net Interest Income After Provision for Credit Losses NONINTEREST INCOME Net gain (loss) on sale of securities Debit and credit card Service charges on deposit accounts Mortgage banking Wealth management Commercial loan swap income Gain on sale of majority interest of insurance business Other Total Noninterest Income NONINTEREST EXPENSE Salaries and employee benefits Data processing and information technology Net occupancy Furniture, equipment and software Other taxes Professional services and legal Marketing FDIC insurance Merger related expenses Other Total Noninterest Expense Income Before Taxes Income taxes (benefit) expense Net Income Earnings per common share—basic Earnings per common share—diluted Dividends declared per common share See Notes to Consolidated Financial Statements 2020 Years ended December 31, 2019 2018 $ 300,960 $ 300,625 $ 269,811 14,918 3,497 1,089 320,464 35,986 5,090 41,076 279,388 131,424 147,964 142 15,093 11,704 10,923 9,957 4,740 — 7,160 59,719 90,115 15,499 14,529 11,050 6,622 6,394 5,996 5,089 2,342 29,008 186,644 21,039 (1) 21,040 0.54 0.53 1.12 $ $ $ $ 14,733 3,302 1,824 320,484 63,026 10,667 73,693 246,791 14,873 231,918 (26) 13,405 13,316 2,491 8,623 5,503 — 9,246 52,558 83,986 14,468 12,103 8,958 3,364 4,244 4,631 758 11,350 23,254 167,116 117,360 19,126 98,234 2.84 2.82 1.09 $ $ $ $ 14,342 3,449 2,224 289,826 40,856 14,532 55,388 234,438 14,995 219,443 — 12,679 13,096 2,762 10,084 1,225 1,873 7,462 49,181 76,108 10,633 11,097 8,083 6,183 4,132 4,192 3,238 — 21,779 145,445 123,179 17,845 105,334 3.03 3.01 0.99 $ $ $ $ 71 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME S&T Bancorp, Inc. and Subsidiaries (dollars in thousands) Net Income Other Comprehensive Income (Loss), Before Tax: Net change in unrealized gains (losses) on available-for-sale securities Net available-for-sale securities losses reclassified into earnings Adjustment to funded status of employee benefit plans Other Comprehensive Income (Loss), Before Tax Income tax (expense) benefit related to items of other comprehensive income Other Comprehensive Income (Loss), After Tax (1) (2) Comprehensive Income 2020 Years ended December 31, 2019 2018 $ 21,040 $ 98,234 $ 105,334 22,683 — 3,549 26,232 (5,591) 20,641 41,681 $ 15,793 26 (1,282) 14,537 (3,100) 11,437 (6,794) — 6,297 (497) 106 (391) $ 109,671 $ 104,943 Due to the adoption of ASU No. 2016-01, net unrealized gains on marketable equity securities were reclassified from accumulated other comprehensive income to retained earnings during the (1) three months ended March 31, 2018. (2) have affected certain lines in the Consolidated Statements of Net Income as follows: the pre-tax amount is included in securities gains/losses-net, the tax expense amount is included in the provision for income taxes and the net of tax amount is included in net income. Reclassification adjustments are comprised of realized security gains or losses. The realized gains or losses have been reclassified out of accumulated other comprehensive income/(loss) and See Notes to Consolidated Financial Statements 72 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY S&T Bancorp, Inc. and Subsidiaries (2) (1) (dollars in thousands, except share and per share data) Balance at December 31, 2017 Net Income for 2018 Other comprehensive (loss) income, net of tax Reclassification of certain tax effects from accumulated other comprehensive income Reclassification of unrealized gains on equity securities Repurchase of warrant Cash dividends declared ($0.99 per share) Treasury stock repurchased (321,731 shares) Treasury stock issued (33,676 shares, net) Recognition of restricted stock compensation expense Balance at December 31, 2018 Net Income for 2019 Other comprehensive income (loss), net of tax Impact of new lease standard Cash dividends declared ($1.09 per share) Common stock issuance cost Common stock issued in acquisition (5,318,962 shares) Treasury stock repurchased (470,708 shares) Treasury stock issued (28,174 shares, net) Recognition of restricted stock compensation expense Balance at December 31, 2019 Net income for 2020 Other comprehensive income (loss), net of tax Impact of adoption of CECL Cash dividends declared ($1.12 per share) Treasury stock repurchased (411,430 shares) Treasury stock issued (149,133 shares, net) Recognition of restricted stock compensation expense Balance at December 31, 2020 Common Stock $ $ $ $ 90,326 — — — — — — — — — 90,326 — — — — — 13,297 — — — 103,623 — — — — — — — 103,623 Additional Paid-in Capital $ 216,106 — — Retained Earnings $ 628,107 105,334 — — — (7,652) — — — 1,891 210,345 — — — — (176) 187,334 — — 2,441 399,944 — — — — — — 724 400,668 $ $ $ 3,427 862 — (34,539) — (1,372) — 701,819 98,234 — 167 (37,360) — — — (1,777) — 761,083 21,040 — (22,590) (43,949) — (5,523) — 710,061 $ $ $ Accumulated Other Comprehensive (Loss)/Income Treasury Stock Total $ $ $ $ (18,427) — (391) (3,427) (862) — — — — — (23,107) — 11,437 — — — — — — — (11,670) — 20,641 — — — — — 8,971 $ $ $ $ (32,081) — — — — — — (12,256) 715 — (43,622) — — — — — — (18,222) 862 — (60,982) — — — (12,559) 4,929 — (68,612) $ $ $ $ 884,031 105,334 (391) — — (7,652) (34,539) (12,256) (657) 1,891 935,761 98,234 11,437 167 (37,360) (176) 200,631 (18,222) (915) 2,441 1,191,998 21,040 20,641 (22,590) (43,949) (12,559) (594) 724 1,154,711 Reclassification of tax effects due to the adoption of ASU No. 2018-02, relating to $(3,660) relates to funded status of pension and $233 relates to net unrealized gains on available-for-sale Reclassification due to the adoption of ASU No. 2016-01, related to changes in fair value for equity securities reclassified out of accumulated other comprehensive income. (1) securities. (2) See Notes to Consolidated Financial Statements 73 CONSOLIDATED STATEMENTS OF CASH FLOWS S&T Bancorp, Inc. and Subsidiaries (dollars in thousands) OPERATING ACTIVITIES Net Income Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses Provision for unfunded loan commitments Depreciation and amortization Net amortization of discounts and premiums Stock-based compensation expense Securities (gains) losses Deferred income taxes (Gain) Loss on sale of fixed assets Gain on the sale of loans, net Gain on the sale of majority interest of insurance business Pension Contribution Net change in: Mortgage loans originated for sale Proceeds from sale of mortgage loans Net increase in interest receivable Net (decrease) increase in interest payable Net (increase) decrease in other assets Net increase in other liabilities Net Cash Provided by Operating Activities INVESTING ACTIVITIES Purchases of securities available-for-sale Proceeds from maturities, prepayments and calls of securities available-for-sale Proceeds from sales of securities available-for-sale Net proceeds from (purchases of) the redemption of Federal Home Loan Bank stock Net increase in loans Proceeds from the sale of loans not originated for resale Purchases of premises and equipment Proceeds from the sale of premises and equipment Net cash acquired from bank acquisitions Proceeds from the sale of majority interest of insurance business Net Cash Used in Investing Activities FINANCING ACTIVITIES Net increase in core deposits Net (decrease) increase in certificates of deposit Net increase (decrease) in securities sold under repurchase agreements Net decrease in short-term borrowings Proceeds from long-term borrowings Repayments of long-term borrowings Treasury shares issued - net Sale of treasury shares Costs to issue equity securities Cash dividends paid to common shareholders Repurchase warrant Net Cash Provided by Financing Activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and Cash Equivalents at End of Year 2020 Years ended December 31, 2019 2018 $ 21,040 $ 98,234 $ 105,334 131,424 — 7,645 4,205 724 (142) (4,402) (23) (8,998) — (115) (361,704) 357,613 (2,560) (3,178) (138,470) 50,392 53,451 (178,389) 205,606 1,349 9,947 (194,768) 547 (5,416) 23 — — (161,101) 591,932 (207,106) 45,275 (206,319) — (27,187) (594) (12,559) — (43,949) — 139,493 31,843 197,823 229,666 $ 14,873 436 8,411 3,243 2,441 26 (381) 37 (1,887) — — (109,624) 109,082 (3,768) (2,223) (4,973) 24,496 138,423 (129,973) 92,412 59,934 6,615 (298,741) 520 (5,153) 71 63,759 — (210,556) 423,203 (27,632) 1,505 (200,000) 10,000 (35,936) (915) (18,222) (176) (37,360) — 114,467 42,334 155,489 197,823 $ 14,995 (54) 7,300 3,180 1,891 — 3,509 (81) (1,537) (1,873) (20,420) (90,142) 93,793 (1,635) 2,353 7,247 4,157 128,017 (92,597) 89,833 — (165) (207,233) 7,695 (4,172) 135 — 4,540 (201,964) 231,756 14,397 (31,778) (70,000) 25,000 (1,987) (657) (12,256) — (34,539) (7,652) 112,284 38,337 117,152 155,489 $ 74 STATEMENTS OF CASH FLOWS S&T Bancorp, Inc. and Subsidiaries (dollars in thousands) Supplemental Disclosures Interest paid Income taxes paid, net of refunds Loans transferred to held for sale Loans transferred to portfolio from held for sale Leased right-of-use operating assets and lease liabilities added to Balance Sheet Transfer net asset to investment in insurance company partnership Net assets (liabilities) from acquisitions, excluding cash and cash equivalents Transfers to other real estate owned and other repossessed assets See Notes to Consolidated Financial Statements 2020 Years ended December 31, 2019 2018 $ $ $ $ $ $ $ $ 44,353 6,231 640 — 91 — — 631 $ $ $ $ $ $ $ $ 75,278 14,663 456 — 49,490 — 43,637 2,592 $ $ $ $ $ $ $ $ 53,035 15,728 — 7,695 — 1,917 — 870 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS S&T Bancorp, Inc. and Subsidiaries NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations S&T Bancorp, Inc., or S&T, was incorporated on March 17, 1983 under the laws of the Commonwealth of Pennsylvania as a bank holding company and has five active direct wholly owned subsidiaries, S&T Bank, 9th Street Holdings, Inc., STBA Capital Trust I, DNB Capital Trust I and DNB Capital Trust II. DNB Capital Trust I and DNB Capital Trust II were acquired with the DNB merger on November 30, 2019. We own a 50 percent interest in Commonwealth Trust Credit Life Insurance Company, or CTCLIC. We are presently engaged in non-banking activities through the following eight entities: 9th Street Holdings, Inc.; S&T Bancholdings, Inc.; CTCLIC; S&T Insurance Group, LLC; Stewart Capital Advisors, LLC.; Downco Inc.; DN Acquisition, Inc.; and DNB Financial Services, Inc. 9th Street Holdings, Inc. and S&T Bancholdings, Inc. are investment holding companies. CTCLIC, which is a joint venture with another financial institution, acts as a reinsurer of credit life, accident and health insurance policies sold by S&T Bank and the other institution. S&T Insurance Group, LLC, through its subsidiaries, offers a variety of insurance products. Stewart Capital Advisors, LLC is a registered investment advisor that manages private investment accounts for individuals and institutions. Downco Inc. and DN Acquisition Company, Inc. were acquired with the DNB merger and were incorporated for the purpose of acquiring and holding Other Real Estate Owned acquired through foreclosure or deed in-lieu-of foreclosure, as well as Bank-occupied real estate. DNB Financial Services was also acquired with the DNB merger and is a Pennsylvania licensed insurance agency, which, through a third-party marketing agreement with Cetera Investment Services, LLC, sells a variety of insurance and investment products. On June 5, 2019 we entered into an agreement to acquire DNB Financial Corporation, or DNB, and the transaction was completed on November 30, 2019. The transaction was valued at $201.0 million and added total assets of $1.1 billion, including $909.0 million in loans, $84.2 million in goodwill and $967.3 million in deposits. On January 1, 2018, we sold a 70 percent majority interest in the assets of our wholly-owned subsidiary S&T Evergreen Insurance, LLC. We transferred our remaining 30 percent ownership interest in the net assets of S&T Evergreen Insurance, LLC to a new entity for a 30 percent ownership interest in a new insurance entity. Refer to Note 28 Sale of a Majority Interest of Insurance Business. We use the equity method of accounting to recognize our partial ownership interest in the new entity. Accounting Policies Our financial statements have been prepared in accordance with GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods then ended. Actual results could differ from those estimates. Our significant accounting policies are described below. Principles of Consolidation The Consolidated Financial Statements include the accounts of S&T and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments of 20 percent to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting. Reclassification Amounts in prior years' financial statements and footnotes are reclassified whenever necessary to conform to the current year’s presentation. Reclassifications had no effect on our results of operations or financial condition. Business Combinations We account for business combinations using the acquisition method of accounting. All identifiable assets acquired, liabilities assumed and any non- controlling interest in the acquiree are recognized and measured as of the acquisition date at fair value. We record goodwill for the excess of the purchase price over the fair value of net assets acquired. Results of operations of the acquired entities are included in the consolidated statement of income from the date of acquisition. 76 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related allowance for credit losses, or ACL. Determining the fair value of acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. In estimating the fair value of our acquired loans, we considered a number of factors including loss rates, internal risk rating, delinquency status, loan type, loan term, prepayment rates, recovery periods and the current interest rate environment. The premium or discount estimated through the loan fair value calculation is recognized into interest income on a level yield basis over the remaining life of the loans. Acquired loans, including those acquired in a business combination, are evaluated to determine if they have experienced more-than-insignificant deterioration in credit quality since origination. When the condition exists, these loans are referred to as purchased credit deteriorated, or PCD. An allowance is recognized for a PCD loan by adding it to the purchase price or fair value in a business combination. There is no provision for credit losses, or PCL, recognized upon acquisition of a PCD loan since the initial allowance is established through the purchase accounting. After initial recognition, the accounting for a PCD loan follows the credit loss model that applies to that type of asset. Purchased financial loans that do not have a more-than-significant deterioration in credit quality since origination are accounted for in a manner consistent with originated loans. An ACL is recorded with a corresponding charge to PCL. Subsequent to the acquisition date, the methods utilized to estimate the required ACL for these loans is similar to the method used for originated loans. Prior to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the methods utilized to estimate the required allowance for loan losses, or ALL for acquired loans was similar to the method used for originated loans; however, we recorded a provision for credit losses only when the required allowance exceeded the remaining fair value adjustment. Acquired loans were considered impaired if there was evidence of credit deterioration since origination and if it was probable at time of acquisition that all contractually required payments would not be collected. Fair Value Measurements We use fair value measurements when recording and disclosing certain financial assets and liabilities. Debt securities, equity securities and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, individually assessed loans, other real estate owned, or OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances. The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets. Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data. Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred. The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis. 77 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Recurring Basis Debt Securities Available-for-Sale We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing service which provide us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market valuation sources for debt securities include observable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and condition databases, and extensive quality control programs. Equity Securities Marketable equity securities with quoted prices in active markets for identical assets are classified as Level 1. Marketable equity securities in markets that are not active and are based on other observable information for comparable assets are classified as Level 2. Marketable equity securities that are not traded in active markets and use unobservable assumptions in the market are classified as Level 3. Securities Held in a Deferred Compensation Plan We use quoted market prices to determine the fair value of our equity security assets. These securities are reported at fair value with the gains and losses included in noninterest income in our Consolidated Statements of Net Income. These assets are held in a Rabbi Trust under a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Rabbi Trust assets are reported in other assets in the Consolidated Balance Sheets. Derivative Financial Instruments We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2. We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparties’ nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings. Nonrecurring Basis Loans Held for Sale Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3. Loans Individually Evaluated Loans that are individually evaluated to determine whether a specific allocation of ACL is needed are reported at fair value. Fair value is determined using the following methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Loans carried at fair value are classified as 78 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Level 3. OREO and Other Repossessed Assets OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value are classified as Level 3. Mortgage Servicing Rights The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. The valuation model includes significant unobservable inputs; therefore, MSRs are classified as Level 3. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into mortgage banking in noninterest income in the Consolidated Statements of Net Income. Other Assets We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above. Financial Instruments In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments. Cash and Cash Equivalents The carrying amounts reported in the Consolidated Balance Sheets for cash and due from banks, including interest-bearing deposits and federal funds sold approximate fair value. Loans Our methodology to fair value loans includes an exit price notion. The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk. Bank Owned Life Insurance Fair value approximates net cash surrender value of bank owned life insurance, or BOLI. Federal Home Loan Bank, or FHLB, and Other Restricted Stock It is not practical to determine the fair value of our FHLB and other restricted stock due to the restrictions placed on the transferability of these stocks; it is presented at carrying value. 79 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Collateral Receivable The carrying amount included in other assets on our Consolidated Balance Sheets approximates fair value. Deposits The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value. Short-Term Borrowings The carrying amounts of securities sold under repurchase agreements, or REPOs, and other short-term borrowings approximate their fair values. Long-Term Borrowings The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values. Junior Subordinated Debt Securities The interest rate on the variable rate junior subordinated debt securities is reset quarterly; therefore, the carrying values approximate their fair values. Loan Commitments and Standby Letters of Credit Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties. Other Estimates of fair value are not made for items that are not defined as financial instruments, including such items as our core deposit intangibles and the value of our trust operations. Cash and Cash Equivalents We consider cash and due from banks, interest-bearing deposits with banks and federal funds sold as cash and cash equivalents. Securities We determine the appropriate classification of securities at the time of purchase. Debt securities are classified as available-for-sale with the intent to hold for an indefinite period of time, but may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. A determination will be made on whether a decline in the fair value below the amortized cost basis is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in Other Comprehensive Income, or OCI, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet with a corresponding adjustment in noninterest income in the Consolidated Statements of Net Income. Both the allowance and the adjustment to net income can be reversed if conditions change. Our policy for credit impairment within the debt securities portfolio is based upon a number of factors, including but not limited to, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its estimated fair value and whether management intends to sell the security or if it is more likely than not that management will be required to sell the investment security prior to the security’s recovery of any decline in its estimated fair value. Realized gains and losses on the sale of these securities are determined using the specific-identification method and are recorded within noninterest income in the Consolidated Statements of Net Income. Bond premiums are amortized to the call date and bond discounts are accreted to the maturity date, both on a level yield basis. 80 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Equity securities are measured at fair value with net unrealized gains and losses recognized in noninterest income in the Consolidated Statements of Net Income. Loans Held for Sale Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. If a loan is transferred from the loan portfolio to the held for sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off against the ACL. Subsequent declines in fair value are recognized as a charge to noninterest income. When a loan is placed in the held for sale category, we stop amortizing the related deferred fees and costs. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold. Gains and losses on sales of loans held for sale are included in other noninterest income in the Consolidated Statements of Net Income. Loans Loans are reported at the principal amount outstanding net of unearned income, unamortized premiums or discounts and deferred origination fees and costs. We defer certain nonrefundable loan origination and commitment fees. Accretion of discounts and amortization of premiums on loans are included in interest income in the Consolidated Statements of Net Income. Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of loan yield over the respective lives of the loans without consideration of anticipated prepayments. If a loan is paid off, the remaining unaccreted or unamortized net origination fees and costs are immediately recognized into income or expense. Interest is accrued and interest income is recognized on loans as earned. Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related ACL. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. In estimating the fair value of our acquired loans, we consider a number of factors including the loan term, internal risk rating, delinquency status, prepayment rates, recovery periods, estimated value of the underlying collateral and the current interest rate environment. 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. Generally, consumer loans are charged off against the ACL upon the loan reaching 90 days past due. Commercial loans are charged off as management becomes aware of facts and circumstances that raise doubt as to the collectability of all or a portion of the principal and when we believe a confirmed loss exists. Nonaccrual or Nonperforming Loans We stop accruing interest on a loan when the borrower’s payment is 90 days past due. Loans are also placed on nonaccrual status when we have doubt about the borrower’s ability to comply with contractual repayment terms, even if payment is not past due. When the interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Interest income is recognized on nonaccrual loans on a cash basis if recovery of the remaining principal is reasonably assured. As a general rule, a nonaccrual loan may be restored to accrual status when its principal and interest is paid current and the bank expects repayment of the remaining contractual principal and interest, or when the loan otherwise becomes well secured and in the process of collection. Troubled Debt Restructurings Troubled debt restructurings, or TDRs, are loans where we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower. We strive to identify borrowers with financial difficulty early and work with them to come to a mutual resolution to modify the terms of their loan before the loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates or principal deferment. While unusual, there may be instances of principal forgiveness. These modifications are generally for longer term periods that would not be considered insignificant. Additionally, we classify loans where the debt obligation has been discharged through a Chapter 7 Bankruptcy and not reaffirmed as TDRs. We individually evaluate all substandard commercial loans that have experienced a forbearance or change in terms agreement, and all substandard consumer and residential mortgage loans that entered into an agreement to modify their existing loan, to determine if they should be designated as TDRs. 81 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring. Allowance for Credit Losses The ACL is a valuation reserve established and maintained by charges against operating income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans. The ACL for homogeneous loans is calculated using a life-time loss rate methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. The ACL model is comprised of six distinct portfolio segments: 1) Construction, 2) Commercial Real Estate, or CRE, 3) Commercial and Industrial, or C&I, 4) Business Banking, 5) Consumer Real Estate and 6) Other Consumer. Each segment has a distinct set of risk characteristics monitored by management. We further evaluate the ACL at a disaggregated level which includes type of collateral and our internal risk rating system for the commercial segments and type of collateral, lien position, and FICO score, for the consumer segments. Historical credit loss experience is the basis for the estimation of expected credit losses. Our quantitative model uses historic data back to the second quarter of 2009. We apply historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on the unemployment forecast and management judgment. For periods beyond our two year reasonable and supportable forecast, we revert to historical loss rates utilizing a straight-line method over a one year reversion period. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, experience and ability of lending staff, quality of the bank’s loan review system, value of underlying collateral, the existence of and changes in concentrations and other external factors. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities. The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all commercial loans greater than $0.5 million that meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) any commercial TDR, or any loan reasonably expected to become a TDR whether on accrual or nonaccrual status and 4) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance. Our ACL Committee meets quarterly to verify the overall appropriateness of the ACL. Additionally, on an annual basis, the ACL Committee meets to validate our ACL methodology. This validation includes reviewing the loan segmentation, critical model assumptions, forecast and the qualitative framework. As a result of this ongoing monitoring process, we may make changes to our ACL to be responsive to the economic environment. Although we believe our process for determining the ACL appropriately considers all the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual losses are higher than management estimates, additional provision for credit losses could be required and could adversely affect our earnings or financial position in future periods. Allowance for Loan Losses Prior to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, we calculated our ALL using an incurred loan loss methodology. The following policy related to the 82 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued ALL in prior periods. The ALL reflects our estimates of probable credit losses inherent within the loan portfolio as of the balance sheet date, and it is presented as a reserve against loans in the Consolidated Balance Sheets. Determination of an appropriate ALL is inherently subjective and may be subject to significant changes from period to period. The methodology for determining the ALL has two main components: evaluation and impairment tests of individual loans and evaluation and impairment tests of certain groups of homogeneous loans with similar risk characteristics. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. A TDR will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For each TDR or other impaired loan, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate. Specific reserves are established based on the following three impairment methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. Our impairment evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the impaired loan is less than the recorded investment in the loan balance. The ALL for homogeneous loans is calculated using a systematic methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. The ALL model is comprised of five distinct portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer. Each segment has a distinct set of risk characteristics monitored by management. We further assess and monitor risk and performance at a more disaggregated level which includes our internal risk rating system for the commercial segments and type of collateral, lien position and loan-to-value, or LTV, for the consumer segments. We first apply historical loss rates to pools of loans with similar risk characteristics. Loss rates are calculated by historical charge-offs that have occurred within each pool of loans over the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from when an event happens that causes the borrower to be unable to pay on a loan until the loss is confirmed through a loan charge-off. In conjunction with our annual review of the ALL assumptions for 2019, we have updated our analysis of LEPs for our Commercial and Consumer loan portfolio segments using our loan charge-off history. Based on our updated analysis, we shortened our LEP over the construction portfolio from 4 years to 3 years and made no other changes. We estimate an LEP of 3 years for CRE, 3 years for construction and 1.25 years for C&I. We estimate an LEP of 2.75 years for Consumer Real Estate and 1.25 years for Other Consumer. Another key assumption is the look-back period, or LBP, which represents the historical data period utilized to calculate loss rates. We used 10.5 years for our LBP for all portfolio segments which encompasses our loss experience during the Financial Crisis, and our more recent improved loss experience. After consideration of the historic loss calculations, management applies qualitative adjustments so that the ALL is reflective of the inherent losses that exist in the loan portfolio at the balance sheet date. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio, changes in lending management, results of internal loan reviews, asset quality trends, collateral values, concentrations of credit risk and other external factors. The evaluation of the various components of the ALL requires considerable judgment in order to estimate inherent loss exposures. Acquired loans are recorded at fair value on the date of acquisition with no carryover of the related ALL. Determining the fair value of acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. In estimating the fair value of our acquired loans, we considered a number of factors including the loan term, internal risk rating, delinquency status, prepayment rates, recovery periods, estimated value of the underlying collateral and the current interest rate environment. Loans acquired with evidence of credit deterioration were evaluated and not considered to be significant. The premium or discount estimated through the loan fair value calculation is recognized into interest income on a level yield or straight-line basis over the remaining contractual life of the loans. Additional credit deterioration on acquired loans, in excess of the original credit discount embedded in the fair value determination on the date of acquisition, will be recognized in the ALL through the provision for loan losses. Our ALL Committee meets quarterly to verify the overall appropriateness of the ALL. Additionally, on an annual basis, the ALL Committee meets to validate our ALL methodology. This validation includes reviewing the loan segmentation, LEP, LBP and the qualitative framework. As a result of this ongoing monitoring process, we may make changes to our ALL to be responsive to the economic environment. 83 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Although we believe our process for determining the ALL appropriately considers all of the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual losses are higher than management estimates, additional provisions for loan losses could be required and could adversely affect our earnings or financial position in future periods. Bank Owned Life Insurance We have purchased life insurance policies on certain executive officers and employees. We receive the cash surrender value of each policy upon its termination or benefits are payable to us upon the death of the insured. Changes in net cash surrender value are recognized in noninterest income or expense in the Consolidated Statements of Net Income. Premises and Equipment Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred, while improvements that extend an asset’s useful life are capitalized and depreciated over the estimated remaining life of the asset. Depreciation expense is computed by the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the particular assets. Depreciation expense is included in net occupancy on the Consolidated Statements of Net Income. Management reviews long-lived assets using events and circumstances to determine if and when an asset is evaluated for recoverability. The estimated useful lives for the various asset categories are as follows: 1) Land and Land Improvements 2) Buildings 3) Furniture and Fixtures 4) Computer Equipment and Software 5) Other Equipment 6) Vehicles 7) Leasehold Improvements Right-of-Use Assets and Lease Liabilities Non-depreciating assets 25 years 5 years 5 years or term of license 5 years 5 years Lesser of estimated useful life of the asset (generally 15 years unless established otherwise) or the remaining term of the lease, including renewal options in the lease that are reasonably assured of exercise We determine if a contract is or contains a lease at inception. Leases are classified as either finance or operating leases. We recognize leases on our Consolidated Balance Sheets as right-of-use, or ROU, assets and related lease liabilities. Finance ROU assets are included in property and equipment and related finance lease liabilities are included in long-term borrowings. Operating lease ROU assets are included in other assets and related operating lease liabilities are included in other liabilities. Our lease liability is calculated as the present value of the lease payments over the lease term discounted using our estimated incremental borrowing rate with similar terms at commencement date. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term for operating leases. Interest and amortization expenses are recognized for finance leases over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term in net occupancy on our Consolidated Statements of Net Income. Refer to Note 10 Right-of-Use Assets and Lease Liabilities for more details. Restricted Investment in Bank Stock FHLB, stock 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 member's asset value, 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 low-cost 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. Both cash and stock dividends are reported as income in taxable investment securities in the Consolidated Statements of Net Income. FHLB stock is evaluated for impairment when events and circumstance indicate that impairment could exist. 84 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Atlantic Community Bankers’ Bank, or ACBB, stock is carried at cost and evaluated for impairment based on the ultimate recoverability of the carrying value. We do not currently use their membership products and services. We acquired ACBB stock through various mergers of banks that were ACBB members. ACBB stock is evaluated for impairment when events and circumstance indicate that impairment could exist. Goodwill and Other Intangible Assets As a result of acquisitions, we have recorded goodwill and identifiable intangible assets in our Consolidated Balance Sheets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. We have one reporting unit, Community Banking. Existing goodwill relates to value inherent in the Community Banking reporting unit and that value is dependent upon our ability to provide quality, cost-effective services in the face of competition from other market participants. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of our services. As such, goodwill value is supported ultimately by profitability that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill, which could adversely impact our earnings in the period in which impairment occurs. The carrying value of goodwill is tested annually for impairment each October 1st or more frequently if events and circumstances indicate that it may be impaired. We test for impairment by comparing the fair value of our Community Banking reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Determining the fair value of a reporting unit is judgmental and involves the use of significant estimates and assumptions. The fair value of the reporting unit is determined by using both a discounted cash flow model and a market based model. The discounted cash flow model has many assumptions including future earnings projections, a long-term growth rate and discount rate. The market based model calculates fair value based on observed price multiples for similar companies. The fair values of each method are then weighted based on relevance and reliability in the current economic environment. We determine the amount of identifiable intangible assets based upon independent core deposit and insurance contract valuations at the time of acquisition. Intangible assets with finite useful lives, consisting primarily of core deposit and customer list intangibles, are amortized using straight-line or accelerated methods over their estimated weighted average useful lives, ranging from 10 to 20 years. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No such events or changes in circumstances occurred during the years ended December 31, 2020, 2019 and 2018. The financial services industry and securities markets can be adversely affected by declining values. If economic conditions result in a prolonged period of economic weakness in the future, our business may be adversely affected. In the event that we determine that our goodwill is impaired, recognition of an impairment charge could have a significant adverse impact on our financial position or results of operations in the period in which the impairment occurs. Variable Interest Entities Variable interest entities, or VIEs, are legal entities that generally either do not have equity investors with voting rights or that have equity investors that do not provide sufficient financial resources for the entity to support its activities. When an enterprise has both the power to direct the economic activities of the VIE and the obligation to absorb losses of the VIE or the right to receive benefits of the VIE, the entity has a controlling financial interest in the VIE. A VIE often holds financial assets, including loans, receivables or other property. The company with a controlling financial interest, the primary beneficiary, is required to consolidate the VIE into its Consolidated Balance Sheets. S&T has three wholly-owned trust subsidiaries, STBA Capital Trust I, DNB Capital Trust I and DNB Capital Trust II, or the Trusts, for which it does not absorb a majority of expected losses or receive a majority of the expected residual returns. The DNB Capital Trust I and DNB Capital Trust II were acquired with the DNB merger. At inception, these Trusts issued floating rate trust preferred securities to the Trustees and used the proceeds from the sale to invest in junior subordinated debt securities issued by us. The Trusts pay dividends on the trust preferred securities at the same rate as the interest we pay on the junior subordinated debt held by the Trusts. The Trusts are VIEs with the third-party investors as their primary beneficiaries, and accordingly, the Trusts and their net assets are not included in our Consolidated Financial Statements. However, the junior subordinated debt securities issued by S&T are included in our Consolidated Balance Sheets. 85 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Joint Ventures We have made investments directly in Low Income Housing Tax Credit, or LIHTC, partnerships formed with third parties. As a limited partner in these operating partnerships, we receive tax credits and tax deductions for losses incurred by the underlying properties. These investments are amortized over a maximum of 10 years, which represents the period over which the tax credits will be utilized. Our investments in Low Income Housing Partnerships, or LIHPs, represent unconsolidated variable interest entities, or VIEs, and the assets and liabilities of the partnerships are not recorded on our balance sheet. We have determined that we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact the economic performance of the partnership and have both the obligation to absorb expected losses and the right to receive benefits. We use the cost method to account for these partnerships. These investments are recorded in other assets on our balance sheet. Amortization expense is included in other noninterest expense in the Consolidated Statements of Net Income. OREO and Other Repossessed Assets OREO and other repossessed assets are included in other assets in the Consolidated Balance Sheets and are comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of a foreclosure. At the time of foreclosure or acceptance of a deed in lieu of foreclosure, these properties are recorded at the lower of the recorded investment in the loan or fair value less cost to sell. Loan losses arising from the acquisition of any such property initially are charged against the ACL. Subsequently, these assets are carried at the lower of carrying value or current fair value less cost to sell. Gains or losses realized upon disposition of these assets are recorded in other expenses in the Consolidated Statements of Net Income. Mortgage Servicing Rights MSRs are recognized as separate assets when commitments to fund a loan to be sold are made. Upon commitment, the MSR is established, which represents the then current estimated fair value of future net cash flows expected to be realized for performing the servicing activities. The estimated fair value of the MSRs is estimated by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the estimated fair value of MSRs, mortgage interest rates, which are used to determine prepayment rates, are held constant over the estimated life of the portfolio. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into noninterest income in the Consolidated Statements of Net Income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. MSRs are regularly evaluated for impairment based on the estimated fair value of those rights. MSRs are stratified by certain risk characteristics, primarily loan term and note rate. If temporary impairment exists within a risk stratification tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the estimated fair value. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced. Derivative Financial Instruments Interest Rate Swaps In accordance with applicable accounting guidance for derivatives and hedging, all derivatives are recognized as either assets or liabilities on the balance sheet at fair value. Interest rate swaps are contracts in which a series of interest rate flows (fixed and variable) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. These derivative positions relate to transactions in which we enter into an interest rate swap with a commercial customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate loan with us receiving a variable rate. These agreements could have floors or caps on the contracted interest rates. Pursuant to our agreements with various financial institutions, we may receive collateral or may be required to post collateral based upon mark-to- market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon our current positions and related future collateral requirements relating to them, we believe any effect on our cash flow or liquidity position to be immaterial. 86 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Derivatives contain an element of credit risk, the possibility that we will incur a loss because a counterparty, which may be a financial institution or a customer, fails to meet its contractual obligations. All derivative contracts with financial institutions may be executed only with counterparties approved by our Asset and Liability Committee, or ALCO, and derivatives with customers may only be executed with customers within credit exposure limits approved in accordance with our credit policy. Interest rate swaps are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives are recorded in current earnings and included in other noninterest income in the Consolidated Statements of Net Income. Interest Rate Lock Commitments and Forward Sale Contracts In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan market. We also offer interest rate lock commitments to potential borrowers. The commitments are generally for a period of 60 days and guarantee a specified interest rate for a loan if underwriting standards are met, but the commitment does not obligate the potential borrower to close on the loan. Accordingly, some commitments expire prior to becoming loans. We may encounter pricing risks if interest rates increase significantly before the loan can be closed and sold. We may utilize forward sale contracts in order to mitigate this pricing risk. Whenever a customer desires these products, a mortgage originator quotes a secondary market rate guaranteed for that day by the investor. The rate lock is executed between the mortgagee and us and in turn a forward sale contract may be executed between us and the investor. Both the rate lock commitment and the corresponding forward sale contract for each customer are considered derivatives but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives during the commitment period are recorded in current earnings and included in mortgage banking in the Consolidated Statements of Net Income. Allowance for Unfunded Commitments In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The allowance for unfunded commitments is determined using a similar methodology as our ACL methodology except that we apply a probability to fund assumption. The allowance for unfunded commitments is included in other liabilities in the Consolidated Balance Sheets. The reserve is calculated by applying historical loss rates and qualitative adjustments to our unfunded commitments. The provision for unfunded commitments is included in the provision for credit losses on the Consolidated Statement of Net Income. Treasury Stock The repurchase of our common stock is recorded at cost. At the time of reissuance, the treasury stock account is reduced using the average cost method. Gains and losses on the reissuance of common stock are recorded in additional paid-in capital, to the extent additional paid-in capital from previous treasury share transactions exists. Any deficiency is charged to retained earnings. Revenue Recognition - Contracts with Customers We earn revenue from contracts with our customers when we have completed our performance obligations and recognize that revenue when services are provided to our customers. Our contracts with customers are primarily in the form of account agreements. Generally, our services are transferred at a point in time in response to transactions initiated and controlled by our customers under service agreements with an expected duration of one year or less. Our customers have the right to terminate their service agreements at any time. We do not defer incremental direct costs to obtain contracts with customers that would be amortized in one year or less. These costs are primarily salaries and employee benefits recognized as expense in the period incurred. Service charges on deposit accounts - We recognize monthly service charges for both commercial and personal banking customers based on account fee schedules. Our performance obligation is generally satisfied and the related revenue recognized at a point in time or over time when the services are provided. Other fees are earned based on specific transactions or customer activity within the customers' deposit accounts. These are earned at the time the transaction or customer activity occurs. Debit and credit card services - Interchange fees are earned whenever debit and credit cards are processed through third-party card payment networks. ATM fees are based on transactions by our customers' and other customers' use of our ATMs or 87 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued other ATMs. Debit and credit card revenue is recognized at a point in time when the transaction is settled. Our performance obligation to our customers is generally satisfied and the related revenue is recognized at a point in time when the service is provided. Third-party service contracts include annual volume and marketing incentives which are recognized over a period of twelve months when we meet thresholds as stated in the service contract. Wealth management services - Wealth management services are primarily comprised of fees earned from the management and administration of trusts, assets under administration and other financial advisory services. Generally, wealth management fees are earned over a period of time between monthly and annually, per the related fee schedules. Our performance obligations with our customers are generally satisfied when we provide the services as stated in the customers' agreements. The fees are based on a fixed amount or a scale based on the level of services provided or amount of assets under management. Other fee revenue - Other fee revenue includes a variety of other traditional banking services such as, electronic banking fees, letters of credit origination fees, wire transfer fees, money orders, treasury checks, checksale fees and transfer fees. Our performance obligations are generally satisfied at a point in time and fee revenue is recognized when the services are provided or the transaction is settled. Wealth Management Fees Assets held in a fiduciary capacity by our subsidiary bank, S&T Bank, are not our assets and are therefore not included in our Consolidated Financial Statements. Wealth management fee income is reported in the Consolidated Statements of Net Income on an accrual basis. Stock-Based Compensation Stock-based compensation includes restricted stock which is measured using the fair value method of accounting. The grant date fair value is recognized over the period during which the recipient is required to provide service in exchange for the award. Compensation expense for time-based restricted stock is recognized ratably over the period of service, generally the entire vesting period, based on fair value on the grant date. Compensation expense for performance-based restricted stock is recognized ratably over the remaining vesting period once the likelihood of meeting the performance measure is probable, based on the fair value on the grant date. We estimate expected forfeitures when stock-based awards are granted and record compensation expense only for awards that are expected to vest. Pensions The expense for S&T Bank’s qualified and nonqualified defined benefit pension plans is actuarially determined using the projected unit credit actuarial cost method. It requires us to make economic assumptions regarding future interest rates and asset returns and various demographic assumptions. We estimate the discount rate used to measure benefit obligations by applying the projected cash flow for future benefit payments to a yield curve of high- quality corporate bonds available in the marketplace and by employing a model that matches bonds to our pension cash flows. The expected return on plan assets is an estimate of the long-term rate of return on plan assets, which is determined based on the current asset mix and estimates of return by asset class. We recognize in the Consolidated Balance Sheets an asset for the plan’s overfunded status or a liability for the plan’s underfunded status. Gains or losses related to changes in benefit obligations or plan assets resulting from experience different from that assumed are recognized as other comprehensive income (loss) in the period in which they occur. To the extent that such gains or losses exceed 10 percent of the greater of the projected benefit obligation or plan assets, they are recognized as a component of pension costs over the future service periods of actively employed plan participants. The funding policy for the qualified plan is to contribute an amount each year that is at least equal to the minimum required contribution as determined under the Pension Protection Act of 2006 and the Bipartisan Budget Act of 2015, but not more than the maximum amount permissible for taxable plan sponsors. Our nonqualified plans are unfunded. On January 25, 2016, the Board of Directors approved an amendment to freeze benefit accruals under the qualified and nonqualified defined benefit pension plans effective March 31, 2016. As a result, no additional benefits are earned by participants in those plans based on service or pay after March 31, 2016. The plan was previously closed to new participants effective December 31, 2007. Marketing Costs We expense all marketing-related costs, including advertising costs, as incurred. 88 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Income Taxes We estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business. On a quarterly basis, management assesses the reasonableness of our effective tax rate based upon our current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year. We classify interest and penalties as an element of tax expense. Deferred income tax assets and liabilities are determined using the asset and liability method and are reported in other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rate and laws. When deferred tax assets are recognized, they are subject to a valuation allowance based on management’s judgment as to whether realization is more likely than not. Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets. We evaluate and assess the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintain tax accruals consistent with the evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to statutory, judicial and regulatory guidance. These changes, when they occur, can affect deferred taxes, accrued taxes, and the current period’s income tax expense and can be significant to our operating results. Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Earnings Per Share Basic earnings per share, or EPS, is calculated using the two-class method to determine income allocated to common shareholders. Unvested share- based payment awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Income allocated to common shareholders is then divided by the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the basic EPS calculation. Diluted EPS is calculated under the more dilutive of either the treasury stock method or the two-class method. Under the treasury stock method, the weighted average number of common shares outstanding is increased by the potentially dilutive common shares. For the two-class method, diluted EPS is calculated for each class of shareholders using the weighted average number of shares attributed to each class. Potentially dilutive common shares are related to restricted stock. Recently Adopted Accounting Standards Updates, or ASU or Update Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract In August 2018, the Financial Accounting Standards Board, or FASB, issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this ASU apply to an entity that is a customer in a hosting arrangement that is a service contract. These amendments relate to accounting for implementation costs (e.g., implementation, setup and other upfront costs). These amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which costs to capitalize and which costs to expense. These amendments require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This ASU is effective for annual and interim periods beginning after December 15, 2019. We adopted this ASU on January 1, 2020. The amendments in this ASU did not materially impact our Consolidated Balance Sheets or Consolidated Statements of Net Income. Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove certain disclosures from Topic 820, modify disclosures and/or require additional disclosures. We adopted this ASU on January 1, 2020. The amendments in this Update required us to change our Fair Value disclosures beginning with the disclosures included in Form 10-Q for the period ended March 31, 2020. The amendments in this ASU did not materially impact our Consolidated Balance Sheets or Consolidated Statements of Net Income. Refer to Note 4 Fair Value Measurements. 89 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other - Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the current requirements for testing goodwill for impairment by eliminating step two from the goodwill impairment test. The amendments are expected to reduce the complexity and costs associated with performing the goodwill impairment test, which could result in recording impairment charges sooner. This Update is effective for any interim and annual impairment tests in reporting periods in fiscal years beginning after December 15, 2019. We adopted the amendments of this ASU on January 1, 2020. The amendments in this ASU did not have any impact on our Consolidated Balance Sheets or Consolidated Statements of Net Income. Financial Instruments - Credit Losses On January 1, 2020, we adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology for determining our provision for credit losses, and ACL, with an expected loss methodology that is referred to as the CECL model. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including our loans and off-balance sheet credit exposures. In addition, ASU 2016-13 made changes to the accounting for available-for- sale debt securities. Credit losses related to available-for-sale debt securities will be measured in a manner similar to the present guidance, except that such losses will be recorded as allowances rather than as reductions in the amortized cost of the related securities. We adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities. Accrued interest deemed uncollectible will be written off through interest income. The majority of our available-for-sale debt securities are government agency-backed securities for which the risk of loss is minimal, and accordingly the ACL is immaterial. In connection with our adoption of ASU 2016-13, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Refer to Note 9 Allowance for Credit Losses for further discussion of these portfolio segments. Our new segmentation breaks out business banking loans from our other loan segments: CRE, C&I, Commercial Construction, Consumer Real Estate and Other Consumer. Business banking loans are commercial loans made to small businesses that are standard, non-complex products and evaluated through a streamlined credit approval process that has been designed to maximize efficiency while maintaining high credit quality standards. The following table details the impact of ASU 2016-13 and the reclassification of loans for the identification of new portfolio loan segments under CECL: (dollars in thousands) Assets: Loans held for investment (outstanding balance) Commercial real estate Commercial and industrial Commercial construction Business banking Consumer real estate Other consumer Allowance for credit losses on loans Total loans held for investment, net Net deferred tax asset Liabilities: Allowance for credit losses on unfunded loan commitments Equity: Retained earnings As Reported Under ASU 2016-13 January 1, 2020 Pre-ASU 2016-13 Impact of ASU 2016-13 Adoption $ $ $ $ $ 2,946,319 1,458,541 345,263 1,092,908 1,235,352 58,769 (89,577) 7,047,575 19,317 4,462 738,493 $ $ $ $ $ 3,416,518 1,720,833 375,445 — 1,545,323 79,033 (62,224) 7,074,928 13,206 3,113 761,083 $ $ $ $ $ (470,199) (262,292) (30,182) 1,092,908 (309,971) (20,264) (27,353) (27,353) 6,111 1,349 (22,590) The adoption of ASU 2016-13 resulted in an increase to our ACL of $27.4 million on January 1, 2020. The increase included $8.2 million for S&T legacy loans and $9.3 million for acquired loans from the DNB merger. Under the previously applicable accounting guidance, a credit reserve was not recorded for acquired loans upon acquisition, however, ASU 2016-13 requires an ACL to be recognized for acquired loans similar to originated loans. We also recorded a day one adjustment of $9.9 million primarily related to a C&I relationship that was charged off in the first quarter of 2020. We obtained information 90 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued on the relationship subsequent to filing our December 31, 2019 Form 10-K, but before the end of the first quarter of 2020. The updated information supported a loss existed at January 1, 2020. As of January 1, 2020, we recorded a cumulative-effect adjustment of $22.6 million to decrease retained earnings related to the adoption of ASU 2016-13. Accounting Standards Issued But Not Yet Adopted Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU apply to all employers that sponsor defined benefit pension or other postretirement plans. These amendments remove certain disclosures from Topic 715-20 and require additional disclosures. The amendments in this ASU will require S&T to update our employee benefits disclosures beginning with our Form 10-Q for the period ended March 31, 2021. The amendments in this ASU will have no impact on our Consolidated Financial Statements. Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplifies the accounting for income taxes by removing certain exceptions and improves the consistent application of GAAP by clarifying and amending other existing guidance. The amendments in this ASU were effective on January 1, 2021 and will have no impact on our Consolidated Financial Statements. Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in US GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): The amendments in this ASU are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of the reference rate reform. The amendments also optionally apply to all entities that designate receive-variable-rate, pay-variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are modified as a result of reference rate reform. The amendments in these ASUs are effective as of March 12, 2020 through December 31, 2022. We are evaluating the impact of these ASUs and we expect LIBOR transition to impact our business operations, but we have not yet determined the impact to our Consolidated Financial Statements. Codification Improvements to Subtopic 310-20, Receivables--Nonrefundable Fees and Other Costs In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables--Nonrefundable Fees and Other Costs. The amendments in this ASU affect the guidance in ASU No. 2017-08, relating to Premium Amortization of Purchased Callable Debt Securities and clarify the Board's intent that an entity should reevaluate whether a callable debt security that has multiple call dates is within scope of paragraph 310-20- 35-33 for each reporting period. For each reporting period, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess shall be amortized to the next call date. If there is no remaining premium or if there are no further call dates, the entity shall reset the effective yield using the payment terms of the debt security. The amendments in this ASU were effective on January 1, 2021 and did not materially impact our Consolidated Financial Statements. 91 NOTE 2. BUSINESS COMBINATIONS On November 30, 2019, we completed our acquisition of DNB Financial Corporation, or DNB, and DNB First National Association, its wholly-owned bank subsidiary, located in Downingtown, Pennsylvania. The acquisition of DNB expanded our Eastern Pennsylvania market by adding 14 banking locations, in an all-stock transaction structured as a merger of DNB with and into S&T, with S&T being the surviving entity. The related systems conversion of DNB into S&T Bank occurred on February 7, 2020. DNB shareholders received, without interest, 1.22 shares of S&T common stock for each share of DNB common stock. The total purchase price was approximately $201.0 million, which included $0.4 million of cash and 5,318,964 S&T common shares at a fair value of $37.72 per share. The fair value of $37.72 per share of S&T common stock was based on the November 30, 2019 closing price. The Merger was accounted for under the acquisition method of accounting and our Consolidated Financial Statements include all DNB Bank transactions beginning on December 1, 2019. Goodwill of $86.0 million at December 31, 2020 was calculated as the excess of the consideration exchanged over the fair value of the identifiable net assets acquired. All of the goodwill was assigned to our Community Banking segment. The goodwill recognized is not deductible for tax purposes. Measurement period adjustments were $1.8 million as of November 30, 2020 which reflect facts and circumstances in existence as of the closing date of the acquisition. These measurement period adjustments primarily related to a $2.4 million reduction in the fair value of loans, a $0.3 million reduction in the fair value of borrowings, a $0.1 million reduction of other liabilities, a $0.1 million reduction in other assets and a $0.3 million increase in deferred income tax assets. The accounting for the acquisition was finalized on November 30, 2020. 92 Table of Contents NOTE 2. BUSINESS COMBINATIONS - continued The following table presents the fair value adjustments and the measurement period adjustments as of the dates presented: November 30, 2019 As Recorded by DNB Fair Value Adjustments As Recorded by S&T November 30, 2020 Measurement Period Adjustments As Recorded by S&T Fair Value of Assets Acquired Cash and cash equivalents Securities and other investments Loans Allowance for credit losses Goodwill Premises and equipment Accrued interest receivable Deferred income taxes Core deposits and other intangible assets Other assets Total Assets Acquired Fair Value of Liabilities Assumed Deposits Borrowings Accrued interest payable and other liabilities Total Liabilities Assumed Total Net Assets Acquired Core Deposit Intangible Asset Wealth Management Intangible Asset Total Fair Value of Net Assets Acquired and Identified Consideration Paid Cash Common stock Fair Value of Total Consideration Goodwill $ $ 64,119 108,715 917,127 (6,487) 15,525 6,782 4,138 2,017 269 24,883 1,137,088 966,263 37,617 11,157 1,015,037 122,051 $ $ — 183 (8,143) 6,487 (15,525) 8,090 — (3,298) (269) (4,278) (16,753) 1,002 (276) (3,184) (2,458) (14,295) $ $ $ $ $ $ $ 64,119 108,898 908,984 — — 14,872 4,138 (1,281) — 20,605 1,120,335 967,265 37,341 7,973 1,012,579 107,756 7,288 1,772 116,816 360 200,631 200,991 84,175 $ $ $ $ $ $ $ — — (2,377) — — — — 311 — (116) (2,182) — (257) (122) (379) (1,803) — — (1,803) — — — 1,803 $ $ $ $ $ $ $ 64,119 108,898 906,607 — — 14,872 4,138 (970) — 20,489 1,118,153 967,265 37,084 7,851 1,012,200 105,953 7,288 1,772 115,013 360 200,631 200,991 85,978 Loans acquired in the Merger were recorded at fair value with no carryover of the related ACL from DNB. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The fair value of the loans acquired was estimated at $909.0 million, net of a $10.5 million discount. The discount is accreted to interest income over the remaining contractual life of the loans. During the measurement period ended November 30, 2020, the fair value of acquired loans was reduced by $2.4 million as we finalized our evaluation of the loan portfolio to reflect facts and circumstances in existence as of the acquisition date. As of December 31, 2020, direct costs related to the DNB merger of $13.7 million were recognized and expensed as incurred. During the year ended December 31, 2020, we recognized $2.3 million of merger related expenses including $0.2 million in legal and professional fees, $1.4 million in severance payments and stay-bonuses, $0.4 million for data processing and $0.3 million in other expenses. As of December 31, 2019, we recognized $11.4 million of merger related expenses, including $4.7 million for data processing contract termination and system conversion costs, $2.8 million in legal and professional expenses, $3.4 million in severance payments and $0.5 million in other expenses. 93 NOTE 3. EARNINGS PER SHARE Diluted earnings per share is calculated using both the two-class and the treasury stock methods with the more dilutive method used to determine reported diluted earnings per share. The two-class method was more dilutive in 2020 and 2019 and was used to determine reported diluted earnings per share. In 2018, the treasury stock method was more dilutive and was used to determine reported diluted earnings per share. The following table reconciles the numerators and denominators of basic and diluted EPS: (dollars in thousands, except share and per share data) Numerator for Earnings per Common Share—Basic: Net income Less: Income allocated to participating shares Net Income Allocated to Common Shareholders Numerator for Earnings per Common Share—Diluted: Net income Denominators: Weighted Average Common Shares Outstanding—Basic Add: Dilutive potential common shares Denominator for Treasury Stock Method—Diluted Weighted Average Common Shares Outstanding—Basic Add: Average participating shares outstanding Denominator for Two-Class Method—Diluted Earnings per common share—basic Earnings per common share—diluted Warrants considered anti-dilutive excluded from dilutive potential common shares - exercise price $31.53 per share, expires January 2019 Restricted stock considered anti-dilutive excluded from dilutive potential common shares (1) 2020 Years ended December 31, 2019 2018 $ $ $ $ $ 21,040 68 20,972 21,040 39,070,439 43,193 39,113,632 39,070,439 2,780 39,073,219 0.54 0.53 — 1,242 $ $ $ $ $ 98,234 260 97,974 98,234 34,628,191 94,763 34,722,954 34,628,191 51,287 34,679,478 2.84 2.82 — 12,686 $ $ $ $ $ 105,334 304 105,030 105,334 34,775,784 199,625 34,975,409 34,775,784 100,733 34,876,517 3.03 3.01 267,106 81,587 We repurchased our outstanding warrant on September 11, 2018 for $7.7 million. Prior to the repurchase, the warrant provided the holder the right to 517,012 shares of common stock at a (1) strike price of $31.53 per share via cashless exercise. 94 NOTE 4. FAIR VALUE MEASUREMENTS The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at December 31, 2020 and 2019. Interest rate lock commitments to borrowers were transferred from Level 2 to Level 3 during the year ended December 31, 2020 due to pull-through factors being a significant unobservable input. There were no transfers between levels for items measured at fair value on a recurring basis at December 31, 2019. Level 1 Level 2 Level 3 Total December 31, 2020 (dollars in thousands) ASSETS Debt securities available-for-sale: U.S. Treasury securities Obligations of U.S. government corporations and agencies Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies Corporate obligations Obligations of states and political subdivisions Total Debt Securities Available-for-Sale Marketable equity securities Total Securities Securities held in a deferred compensation plan Derivative financial assets: Interest rate swaps Interest rate lock commitments Total Assets LIABILITIES Derivative financial liabilities: Interest rate swaps Forward sale contracts Total Liabilities (dollars in thousands) ASSETS Debt securities available-for-sale: U.S. Treasury securities Obligations of U.S. government corporations and agencies Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies Corporate obligations Obligations of states and political subdivisions Total Debt Securities Available-for-Sale Marketable equity securities Total Securities Securities held in a deferred compensation plan Derivative financial assets: Interest rate swaps Interest rate lock commitments Forward sale contracts Total Assets LIABILITIES Derivative financial liabilities: Interest rate swaps Total Liabilities 95 $ $ $ $ $ $ $ $ — — — — — — — — 3,228 3,228 6,794 — — 10,022 — — — Level 1 — — — — — — — — 5,078 5,078 5,987 — — — 11,065 — — $ $ $ $ $ $ $ $ 10,282 82,904 209,296 67,778 273,681 2,025 124,427 770,393 72 770,465 — 78,319 — 848,784 79,033 385 79,418 $ $ $ $ December 31, 2019 Level 2 Level 3 10,040 157,697 189,348 22,418 275,870 7,627 116,133 779,133 72 779,205 — 25,647 321 1 805,174 25,615 25,615 $ $ $ $ — — — — — — — — — — — — 2,900 2,900 — — — — — — — — — — — — — — — — — — — — $ $ $ $ $ $ $ $ 10,282 82,904 209,296 67,778 273,681 2,025 124,427 770,393 3,300 773,693 6,794 78,319 2,900 861,706 79,033 385 79,418 Total 10,040 157,697 189,348 22,418 275,870 7,627 116,133 779,133 5,150 784,283 5,987 25,647 321 1 816,239 25,615 25,615 Table of Contents NOTE 4. FAIR VALUE MEASUREMENTS -- continued Assets Recorded at Fair Value on a Nonrecurring Basis We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either December 31, 2020 or December 31, 2019. For Level 3 assets measured at fair value on a nonrecurring basis at December 31, 2020 and 2019, the significant unobservable inputs used in the fair value measurements were as follows: Valuation Technique Significant Unobservable Inputs (dollars in thousands) Loans individually evaluated Other real estate owned December 31, 2020 $ 67,402 Collateral method 1,953 Collateral method Mortgage servicing rights 4,976 Discounted cash flow method Loans held for sale Total Assets NA - not applicable 586 Collateral method $ 74,917 Appraisal adjustment Costs to sell Discount rate Constant prepayment rates none (dollars in thousands) December 31, 2019 Valuation Technique Significant Unobservable Inputs Loans individually evaluated $ 38,697 Collateral method Appraisal adjustment Discounted cash flow method Other real estate owned 3,231 Collateral method Mortgage servicing rights 1,134 Discounted cash flow method Discount rate Costs to sell Discount rate Constant prepayment rates Total Assets (1) (2) $ 43,062 Weighted averages for loans individually evaluated were weighted by loan amounts. Weighted averages for other real estate owned were weighted by OREO balances. Weighted averages for mortgage services rights discount rate and prepayment rates were weighted based on note rate tranches. (3) 96 0% 4% Range - - 9.24% - 8.82% - 47% 7.00% 12.55% 14.58% NA Weighted Average (1) (2) (3) 16.90% 4.92% 9.42% 13.37% NA Range - 20% 0% 4.75% - 5.50% 7.00% 9.39% - 7.46% - 12.54% 12.74% Weighted Average (1) (2) (3) 8.55% 5.28% 7.00% 9.49% 9.73% Table of Contents NOTE 4. FAIR VALUE MEASUREMENTS -- continued The carrying values and fair values of our financial instruments at December 31, 2020 and 2019 are presented in the following tables: (dollars in thousands) ASSETS Cash and due from banks, including interest-bearing deposits Securities Loans held for sale Portfolio loans, net Bank owned life insurance FHLB and other restricted stock Collateral receivable Securities held in a deferred compensation plan Mortgage servicing rights Interest rate swaps Interest rate lock commitments LIABILITIES Deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Interest rate swaps Forward sale contracts (1) As reported in the Consolidated Balance Sheets (dollars in thousands) ASSETS Cash and due from banks, including interest-bearing deposits Securities Loans held for sale Portfolio loans, net Bank owned life insurance FHLB and other restricted stock Securities held in a deferred compensation plan Mortgage servicing rights Interest rate swaps Interest rate lock commitments Forward sale contracts LIABILITIES Deposits Securities sold under repurchase agreements Short-term borrowings Long-term borrowings Junior subordinated debt securities Interest rate swaps (1) As reported in the Consolidated Balance Sheets $ $ $ $ Fair Value Measurements at December 31, 2020 Total Level 1 Level 2 Level 3 229,666 773,693 18,528 7,028,446 82,303 13,030 77,936 6,794 4,976 78,319 2,900 7,422,894 65,163 75,000 24,545 64,083 79,033 385 $ $ 229,666 3,228 — — — — 77,936 6,794 — — — 6,033,075 65,163 75,000 4,494 64,083 — — $ $ — 770,465 — — 82,303 — — — — 78,319 — 1,389,819 — — 20,051 — 79,033 385 $ $ — — 18,528 7,028,446 — 13,030 — — 4,976 — 2,900 — — — — — — — Fair Value Measurements at December 31, 2019 Total Level 1 Level 2 Level 3 197,823 784,283 5,256 6,940,875 80,473 22,977 5,987 4,650 25,647 321 1 7,034,595 19,888 281,319 51,339 64,277 25,615 $ $ 197,823 5,078 — — — — 5,987 — — — — 5,441,143 19,888 281,319 4,678 64,277 — $ $ — 779,205 — — 80,473 — — — 25,647 321 1 1,593,452 — — 46,661 — 25,615 $ $ — — 5,256 6,940,875 — 22,977 — 4,650 — — — — — — — — $ $ $ $ Carrying (1) Value 229,666 773,693 18,528 7,108,248 82,303 13,030 77,936 6,794 4,976 78,319 2,900 7,420,538 65,163 75,000 23,681 64,083 79,033 385 Carrying Value (1) 197,823 784,283 5,256 7,074,928 80,473 22,977 5,987 4,662 25,647 321 1 7,036,576 19,888 281,319 50,868 64,277 25,615 97 NOTE 5. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS The Board of Governors of the Federal Reserve System, or the Federal Reserve, imposes certain reserve requirements on all depository institutions. These reserves are maintained in the form of vault cash or as an interest-bearing balance with the Federal Reserve. The required reserves averaged $15.5 million for 2020, $43.9 million for 2019 and $38.8 million for 2018. The decrease in the required reserve average from 2019 to 2020 was due to the Federal Reserve reducing the reserve requirement ratio to zero percent effective on March 26, 2020. The Federal Reserve maintained this reserve requirement ratio for the remainder of 2020. NOTE 6. DIVIDEND AND LOAN RESTRICTIONS S&T is a legal entity separate and distinct from its banking and other subsidiaries. A substantial portion of our revenues consist of dividend payments we receive from S&T Bank. S&T Bank, in turn, is subject to state laws and regulations that limit the amount of dividends it can pay to us. In addition, both S&T and S&T Bank are subject to various general regulatory policies relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The Federal Reserve has indicated that banking organizations should generally pay dividends only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. In connection with our reduced net income and our inability to fully fund the dividend from earnings over the prior year, due in substantial part to the customer fraud that occurred in the second quarter of 2020, we received non-objection letters from the Federal Reserve to continue to pay our dividends declared in the third and fourth quarter of 2020. Thus, under certain circumstances based upon our financial condition, our ability to declare and pay quarterly dividends may require consultation with the Federal Reserve and may be prohibited by applicable Federal Reserve Board guidance. Federal law prohibits us from borrowing from S&T Bank unless such loans are collateralized by specific obligations. Further, such loans are limited to 10 percent of S&T Bank’s capital stock and surplus. NOTE 7. SECURITIES The following table presents the fair values of our securities portfolio at the dates presented: (dollars in thousands) Debt securities available-for-sale Marketable equity securities Total Securities Debt Securities Available-for-Sale December 31, 2020 $ $ 770,393 3,300 773,693 2019 $ $ 779,133 5,150 784,283 The following tables present the amortized cost and fair value of debt securities available-for-sale as of December 31, 2020 and December 31, 2019: (dollars in thousands) U.S. Treasury securities Obligations of U.S. government corporations and agencies Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies Corporate Obligations Obligations of states and political subdivisions Total Debt Securities Available-for-Sale December 31, 2020 Gross Unrealized Gains 302 $ Gross Unrealized Losses — $ Amortized Cost 9,980 $ Fair Value 10,282 $ Amortized Cost 9,969 $ December 31, 2019 Gross Unrealized Gains 71 $ Gross Unrealized Losses — $ 78,755 202,975 66,960 258,875 2,021 117,439 737,005 $ $ 4,149 6,410 818 14,806 5 6,988 33,478 $ — (89) — — (1) — (90) 82,904 209,296 67,778 273,681 2,025 124,427 770,393 $ 155,969 186,879 22,120 273,771 7,603 112,116 768,427 $ $ 1,773 2,773 321 2,680 24 4,017 11,659 $ (45) (304) (23) (581) — — (953) Fair Value 10,040 $ 157,697 189,348 22,418 275,870 7,627 116,133 779,133 $ 98 Table of Contents NOTE 7. SECURITIES AVAILABLE-FOR-SALE -- continued The following table shows the composition of gross and net realized gains and losses for the periods presented: (dollars in thousands) Gross realized gains Gross realized losses Net Realized Gains/(Losses) 2020 219 (77) 142 $ $ Years ended December 31, 2019 41 (67) (26) $ $ 2018 — — — $ $ The following tables present the fair value and the age of gross unrealized losses on debt securities available-for-sale by investment category as of the dates presented: (dollars in thousands) U.S. Treasury securities Obligations of U.S. government corporations and agencies Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies Corporate Obligations Obligations of states and political subdivisions Total Less Than 12 Months December 31, 2020 12 Months or More Number of Securities — $ Fair Value — Unrealized Losses — $ Number of Securities — $ Fair Value — Unrealized Losses — $ Number of Securities — $ Total Fair Value — Unrealized Losses — $ — 2 — 1 — 3 — 35,697 — 499 — 36,196 $ $ — (89) — (1) — (90) — — — — — — — $ — — — — — — — $ — — — — — — — — 2 — — 1 — 3 — 35,697 — — 499 — 36,196 $ $ — (89) — — (1) — (90) 99 Table of Contents NOTE 7. SECURITIES AVAILABLE-FOR-SALE -- continued Less Than 12 Months December 31, 2019 12 Months or More (dollars in thousands) U.S. Treasury securities Obligations of U.S. government corporations and agencies Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies (1) Corporate Obligations Obligations of states and political subdivisions Total Number of Securities — $ Fair Value — Unrealized Losses — $ Number of Securities — $ 3 6 1 9 1 22,638 23,393 982 90,005 79 — 20 $ — 137,097 $ (45) (73) (2) (581) — — (701) — 6 1 — — — 7 Fair Value — Unrealized Losses — $ — — 25,254 (231) 2,534 — — — 27,788 $ $ (21) — — — (252) Number of Securities — $ 3 12 2 9 1 Total Fair Value — Unrealized Losses — $ 22,638 (45) 48,647 (304) 3,516 90,005 79 — 27 $ — 164,885 $ (23) (581) — — (953) (1) Unrealized loss on Corporate Obligations rounded to less than one thousand dollars. We evaluate securities with unrealized losses quarterly to determine if the decline in fair value has resulted from credit loss or other factors. We do not believe any individual unrealized loss as of December 31, 2020 represents an impairment. At December 31, 2020, there were 3 debt securities and at December 31, 2019 there were 27 debt securities in an unrealized loss position. The unrealized losses on debt securities were primarily attributable to changes in interest rates and not related to the credit quality of the issuers. All debt securities are determined to be investment grade and paying principal and interest according to the contractual terms of the security. 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 concluded that the ACL for debt securities was immaterial at December 31, 2020. Prior to the adoption of ASU 2016-13 there was no other than temporary impairment, or OTTI, recorded during the year ended December 31, 2019. The following table presents net unrealized gains and losses, net of tax, on debt securities available-for-sale included in accumulated other comprehensive income/(loss), for the periods presented: (dollars in thousands) Total unrealized gains/(losses) on debt securities available-for- sale Income tax (expense) benefit Net Unrealized Gains/(Losses), Net of Tax Included in Accumulated Other Comprehensive Income/(Loss) $ $ Gross Unrealized Gains December 31, 2020 Gross Unrealized Losses Net Unrealized Gains (Losses) Gross Unrealized Gains Gross Unrealized Losses Net Unrealized Gains (Losses) December 31, 2019 33,478 (7,128) 26,350 $ $ (90) 19 (71) $ $ 33,388 (7,109) 26,279 $ $ 11,659 (2,486) 9,173 $ $ (953) 203 (750) $ $ 10,706 (2,283) 8,423 The amortized cost and fair value of debt securities available-for-sale at December 31, 2020 by contractual maturity are included in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 100 Table of Contents NOTE 7. SECURITIES AVAILABLE-FOR-SALE -- continued (dollars in thousands) Obligations of the U.S. Treasury, U.S. government corporations and agencies, and obligations of states and political subdivisions Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Debt Securities Available-for-Sale With Maturities Collateralized mortgage obligations of U.S. government corporations and agencies Residential mortgage-backed securities of U.S. government corporations and agencies Commercial mortgage-backed securities of U.S. government corporations and agencies Corporate Obligations Total Debt Securities Available-for-Sale December 31, 2020 Amortized Cost Fair Value $ $ 40,495 103,119 41,370 21,190 206,174 202,975 66,960 258,875 2,021 737,005 $ $ 41,006 109,043 43,765 23,799 217,613 209,296 67,778 273,681 2,025 770,393 At December 31, 2020 and 2019, debt securities with carrying values of $308 million and $286 million were pledged for various regulatory and legal requirements. Marketable Equity Securities The following table presents realized and unrealized net gains and losses for our marketable equity securities for the periods presented: (dollars in thousands) Marketable Equity Securities Net market (losses)/gains recognized Less: Net gains recognized for equity securities sold Unrealized (Losses)/Gains on Equity Securities Still Held Years ended December 31, 2020 (500) 142 (642) $ $ 2019 334 — 334 $ $ 2018 (328) — (328) $ $ 101 NOTE 8. LOANS AND LOANS HELD FOR SALE Loans are presented net of unearned income of $16.0 million and $4.6 million at December 31, 2020 and 2019 and net of a discount related to purchase accounting fair value adjustments of $8.6 million and $12.3 million at December 31, 2020 and December 31, 2019. The following table summarizes the composition of originated and acquired loans as of the dates presented: (dollars in thousands) Commercial Commercial real estate Commercial and industrial Commercial construction Business banking Total Commercial Loans Consumer Consumer Real Estate Other Consumer Total Consumer Loans Total Portfolio Loans Loans held for sale Total Loans (1) December 31, 2020 2019 $ $ 2,791,947 1,559,552 466,077 1,160,067 5,977,643 1,167,332 80,885 1,248,217 7,225,860 18,528 7,244,388 $ $ 3,059,592 1,480,529 370,060 846,790 5,756,971 1,295,207 84,974 1,380,181 7,137,152 5,256 7,142,408 (1) Excludes interest receivable of $24.7 million at December 31, 2020 and $22.1 million at December 31, 2019. Interest receivable is included in other assets in the Consolidated Balance Sheets. Commercial and industrial loans, or C&I, included $465 million of loans originated under the Paycheck Protection Program, or PPP, at December 31, 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law. The CARES Act included the PPP, a program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted expenses in accordance with the requirements of the PPP. The loans are 100 percent guaranteed by the Small Business Administration, or SBA. These loans carry a fixed rate of 1.00 percent and a term of two years, or five years for loans approved by the SBA, on or after June 5, 2020. Payments are deferred for at least six months of the loan. The SBA pays us a processing fee ranging from 1.0 percent to 5.0 percent based on the size of the loan. Interest is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income over the contractual life of the loan using the level yield method. When a PPP loan is paid off or forgiven by the SBA, the remaining unaccreted or unamortized net origination fees or costs will be immediately recognized into income. We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry and actively managing concentrations. When concentrations exist in certain segments, we mitigate this risk by reviewing the relevant economic indicators and internal risk rating trends and through stress testing of the loans in these segments. Total commercial loans represented 79 percent of total portfolio loans at December 31, 2020 and 77 percent at December 31, 2019. Within our commercial portfolio, the CRE and Commercial Construction portfolios combined comprised $3.7 billion or 66 percent of total commercial loans and 51 percent of total portfolio loans at December 31, 2020 and comprised $3.8 billion or 69 percent of total commercial loans and 53 percent of total portfolio loans at December 31, 2019. Further segmentation of the CRE and Commercial Construction portfolios by collateral type reveals no concentration in excess of 15 percent of both total CRE and Commercial Construction loans at December 31, 2020 and 11 percent at December 31, 2019. We lend primarily in Pennsylvania and the contiguous states of Ohio, New York, West Virginia and Maryland. The majority of our commercial and consumer loans are made to businesses and individuals in this geography, resulting in a concentration. We believe our knowledge and familiarity with customers and conditions locally outweighs this geographic concentration risk. The conditions of the local and regional economies are monitored closely through publicly available data and information supplied by our customers. We also use subscription services for additional geographic and industry specific information. Our CRE and Commercial Construction portfolios have exposure outside this geography of 5.9 percent of the combined portfolios at December 31, 2020 and 5.4 percent at December 31, 2019. Exposure of total portfolio loans was 3.0 percent at December 31, 2020 compared to 2.9 percent of total portfolio loans at December 31, 2019. 102 Table of Contents NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued The following table summarizes our restructured loans as of the dates presented: (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Business banking Consumer real estate Other consumer Total (1) Performing TDRs 14 7,090 3,267 1,503 5,581 5 17,460 $ $ December 31, 2020 Nonperforming TDRs 16,654 9,885 — 430 2,319 — 29,289 $ $ $ $ (1) Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Residential mortgage Home equity Other consumer Total Performing TDRs 22,233 6,909 1,425 2,013 4,371 9 36,960 $ $ December 31, 2019 Nonperforming TDRs 6,713 695 — 822 678 4 8,912 $ $ $ $ Total TDRs 16,668 16,975 3,267 1,933 7,900 5 46,748 Total TDRs 28,946 7,604 1,425 2,835 5,049 13 45,872 The significant increase in nonperforming TDRs at December 31, 2020 compared to December 31, 2019 was primarily related to a $21.3 million CRE relationship that went nonaccrual in the first quarter of 2020 and was charged down by $10.0 million in the third quarter of 2020, leaving a remaining outstanding balance of $11.3 million and an $11.2 million C&I relationship that went nonaccrual and was charged down by $1.6 million during the fourth quarter of 2020 leaving a remaining outstanding balance of $9.6 million. Both relationships experienced continued deterioration as a result of the COVID- 19 pandemic. 103 Table of Contents NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued The following tables present the restructured loans by loan segment and by type of concession for the years ended December 31: (dollars in thousands) Totals by Loan Segment Commercial Real Estate Payment deferral Total Commercial Real Estate Business Banking Maturity date extension Total Business Banking Commercial and Industrial Maturity date extension Maturity date extension and interest rate reduction Payment delay and below market interest rate Payment deferral Total Commercial and Industrial Commercial Construction Maturity date extension Total Commercial Construction Consumer Real Estate Consumer bankruptcy Maturity date extension and reduction in payment Payment deferral (2) Total Consumer Real Estate Other Consumer (2) Consumer bankruptcy Total Other Consumer Totals by Concession Type Payment deferral Maturity date extension Maturity date extension and interest rate reduction Payment delay and below market interest rate (2) Consumer bankruptcy Maturity date extension and reduction in payment 2020 Number of Loans Pre-Modification Outstanding Recorded (1) Investment Post-Modification Outstanding Recorded (1) Investment Total Difference in Recorded Investment 1 1 1 1 1 1 2 1 5 3 3 22 6 1 29 1 1 3 5 1 2 23 6 40 $ $ 5,292 5,292 333 333 11,195 3,735 362 93 15,385 2,592 2,592 988 670 30 1,688 5 5 $ 5,415 14,120 3,735 362 993 670 25,295 $ 4,791 4,791 165 165 9,605 3,735 354 22 13,716 2,329 2,329 956 660 29 1,645 4 4 $ 4,842 12,099 3,735 354 960 660 22,650 $ (501) (501) (168) (168) (1,590) — (8) (71) (1,669) (263) (263) (32) (10) (1) (43) (1) (1) (573) (2,021) — (8) (33) (10) (2,645) (3) Total (1) balance represents the outstanding balance at period end. (2) (3) Measurement of Credit Losses on Financial Instruments. Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification Consumer bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed. Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): 104 Table of Contents NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued (dollars in thousands) Totals by Loan Segment Commercial Real Estate Maturity date extension and interest rate reduction Principal deferral Principal deferral and maturity date extension Below market interest rate Total Commercial Real Estate Commercial and Industrial Maturity date extension and interest rate reduction Principal deferral Principal deferral and maturity date extension Total Commercial and Industrial Residential Mortgage Principal deferral and maturity date extension (2) Consumer bankruptcy Total Residential Mortgage Home equity Principal deferral and maturity date extension Interest rate reduction Consumer bankruptcy (2) Total Home Equity Installment and Other Consumer Consumer bankruptcy (2) Total Installment and Other Consumer Totals by Concession Type Maturity date extension and interest rate reduction Principal deferral Principal deferral and Maturity date extension Interest rate reduction Below market interest rate Consumer bankruptcy (2) (3) Total (1) balance represents the outstanding balance at period end. (2) (3) Measurement of Credit Losses on Financial Instruments. 2019 Number of Loans Pre-Modification Outstanding Recorded (1) Investment Post-Modification Outstanding Recorded (1) Investment Total Difference in Recorded Investment 1 3 1 2 7 1 1 1 3 3 3 6 2 2 29 33 4 4 2 4 7 2 2 36 53 150 23,517 436 569 24,672 4,751 1,250 292 6,294 183 165 348 39 190 886 1,116 145 23,059 436 1,519 25,159 4,136 1,250 275 5,661 183 157 340 39 188 810 1,037 $ $ 16 16 $ 11 11 $ 4,902 24,767 950 190 569 1,068 32,446 $ 4,280 24,309 933 188 1,519 977 32,206 $ (6) (458) — 950 486 (616) — (17) (633) — (9) (9) — (2) (77) (79) (5) (5) (622) (458) (17) (2) 950 (91) (240) Excludes loans that were fully paid off or fully charged-off by period end. The pre-modification balance represents the balance outstanding prior to modification. The post-modification Consumer bankruptcy loans where the debt has been legally discharged through the bankruptcy court and not reaffirmed. Refer to Note 1, Basis of Presentation for details of reclassification of our portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): In response to the coronavirus, or COVID-19, pandemic and its economic impact on our customers, we implemented a short-term modification program that complies with the CARES Act to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments for 90 days and up to a maximum of 180 days for our commercial customers. The customer remains responsible for deferred payments along with any additional interest accrued during the deferral period. For our consumer customers, interest does not accrue during the deferral period and the maturity date is extended by the length of the deferral period. Under the applicable guidance, none of these loans were considered restructured during 2020. We had 52 loans that were modified totaling $195.6 million at December 31, 2020. 105 Table of Contents NOTE 8. LOANS AND LOANS HELD FOR SALE -- continued We had 20 commitments for $0.8 million to lend additional funds on TDRs at December 31, 2020 compared to 24 commitments for $4.6 million at December 31, 2019. We had one TDR with a total loan balance of $0.1 million that returned to accruing status during 2020. We returned six TDRs totaling $0.5 million to accruing status during 2019. Defaulted TDRs are defined as loans having a payment default of 90 days or more after the restructuring takes place that were restructured within the last 12 months prior to defaulting. There were six TDRs totaling $11.8 million that defaulted during the year ended December 31, 2020 compared to no TDRs that defaulted during 2019. The increase in defaulted TDRs was primarily related to a $21.3 million CRE relationship that went nonaccrual in the first quarter of 2020 and charged down by $10.0 million in the third quarter of 2020, leaving a remaining outstanding balance of $11.3 million. The relationship experienced continued deterioration as a result of the COVID-19 pandemic. The following table is a summary of nonperforming assets as of the dates presented: (dollars in thousands) Nonperforming Assets Nonaccrual loans Nonaccrual TDRs Total nonaccrual loans OREO Total Nonperforming Assets December 31, 2020 2019 $ $ 117,485 29,289 146,774 2,155 148,929 $ $ 45,145 8,912 54,057 3,525 57,582 NPAs increased $91.3 million to $148.9 million during 2020 compared to $57.6 million at December 31, 2019. The significant increase in nonperforming loans primarily related to the addition of $56.3 million of hotel loans that moved to nonperforming during the fourth quarter of 2020 as a result of continued deterioration due to the COVID-19 pandemic. Also moving to nonperforming during 2020 were $11.3 million and $6.7 million CRE relationships that experienced financial deterioration that led to cash flow shortfalls, a $5.9 million CRE relationship that was associated with the customer fraud and a $15.1 million C&I relationship that experienced financial deterioration that led to cash flow shortfalls. The following table presents a summary of the aggregate amount of loans to certain officers, directors of S&T or any affiliates of such persons as of December 31: Balance at beginning of year New loans Repayments or no longer considered a related party Balance at end of year 2020 2019 8,225 3,343 (5,239) 6,329 $ $ 8,682 2,442 (2,899) 8,225 $ $ NOTE 9. ALLOWANCE FOR CREDIT LOSSES We maintain an ACL at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers our historical loss experience, current conditions and forecasts of future economic conditions as of the balance sheet date. We develop and document a systematic ACL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Business Banking, 5) Consumer Real Estate and 6) Other Consumer. The following are key risks within each portfolio segment: CRE—Loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes such as hotels, retail, multifamily and health care. The primary sources of repayment for these loans are the operations of the individual projects and global cash flows of the debtors. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type and the business prospects of the lessee, if the project is not owner-occupied. C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. The primary source of repayment for these loans is cash flow from the operations of the company. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Commercial Construction—Loans made to finance construction of buildings or other structures, as well as to finance the 106 Table of Contents Note 9. ALLOWANCE FOR CREDIT LOSSES - continued acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Business Banking—Commercial loans made to small businesses that are standard, non-complex products evaluated through a streamlined credit approval process that has been designed to maximize efficiency while maintaining high credit quality standards that meet small business market customers’ needs. The business banking portfolio is monitored by utilizing a standard and closely managed process focusing on behavioral and performance criteria. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type and business. Consumer Real Estate—Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. Management monitors various credit quality indicators for the commercial, business banking and consumer loan portfolios, including changes in risk ratings, nonperforming status and delinquency on a monthly basis. We monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention or substandard. Our risk ratings are consistent with regulatory guidance and are as follows: Pass—The loan is currently performing and is of high quality. Special Mention—A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the strength of our credit position at some future date. Substandard—A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Doubtful—Loans classified doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. 107 Table of Contents Note 9. ALLOWANCE FOR CREDIT LOSSES - continued The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of December 31, 2020: (dollars in thousands) Commercial Real Estate Pass Special Mention Substandard Doubtful Total Commercial Real Estate Commercial and Industrial Pass Special Mention Substandard Doubtful Total Commercial and Industrial Commercial Construction Pass Special Mention Substandard Doubtful Total Commercial Construction Business Banking Pass Special Mention Substandard Doubtful Total Business Banking Consumer Real Estate Pass Special Mention Substandard Doubtful Total Consumer Real Estate Other consumer Pass Special Mention Substandard Doubtful Total Other Consumer 2020 2019 2018 2017 2016 2015 and Prior Revolving Revolving- Term Total Risk Rating $ 334,086 $ — — — 334,086 454,131 3,697 — — 457,828 131,235 1,578 — — 132,813 296,254 — 103 — 296,357 120,736 — — — 120,736 18,849 — 15 — 18,864 422,800 $ 35,499 17,259 645 476,203 394,963 $ 10,200 12,781 — 417,944 277,724 $ 22,502 19,914 — 320,140 307,321 $ 55,174 50,700 1,989 415,184 615,217 $ 75,022 83,792 6,529 780,560 199,453 8,211 7,793 — 215,457 224,794 2,533 3,580 — 230,907 154,335 1,060 1,078 — 156,473 122,171 — 373 — 122,544 13,162 — — — 13,162 140,049 2,628 2,613 — 145,290 59,649 3,886 — — 63,535 123,207 1,147 3,896 — 128,250 67,700 1,489 742 — 69,931 6,784 — — — 6,784 68,607 697 8,544 4,401 82,249 2,420 — 501 — 2,921 86,552 1,602 3,209 — 91,363 63,653 — 1,480 — 65,133 3,395 — — — 3,395 27,645 768 75 — 28,488 6,346 — — — 6,346 77,238 1,084 3,880 — 82,202 73,805 — 2,449 — 76,254 2,082 — — — 2,082 206,782 1,046 13,781 — 221,609 4,555 8,593 3,629 — 16,777 266,042 6,866 25,871 — 298,779 243,939 150 6,958 — 251,047 687 — 3,367 — 4,054 46,330 — 1,500 — 47,830 383,082 23,527 2,022 — 408,631 12,778 — — — 12,778 103,571 637 1,341 — 105,549 438,888 132 — — 439,020 26,647 — 744 — 27,391 — $ — — — — 2,398,441 198,397 185,946 9,163 2,791,947 — — — — — — — — — — 291 123 680 — 1,094 22,667 — — — 22,667 2,767 — 2,386 — 5,153 1,479,749 40,574 34,828 4,401 1,559,552 441,777 16,590 7,710 — 466,077 1,107,490 12,519 40,058 — 1,160,067 1,153,559 1,771 12,002 — 1,167,332 74,373 — 6,512 — 80,885 Total Loan Balance $ 1,360,684 $ 1,214,746 $ 831,734 $ 565,201 $ 610,556 $ 1,572,826 $ 1,041,199 $ 28,914 $ 7,225,860 We monitor the delinquent status of the commercial and consumer portfolios on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans. 108 Table of Contents Note 9. ALLOWANCE FOR CREDIT LOSSES - continued The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of December 31, 2020: (dollars in thousands) 2020 2019 2018 2017 2016 2015 and Prior Revolving Revolving- Term Total Commercial Real Estate Performing Nonperforming Total Commercial Real Estate Commercial and Industrial Performing Nonperforming Total Commercial and Industrial Commercial Construction Performing Nonperforming Total Commercial Construction Business Banking Performing Nonperforming Total Business Banking Consumer Real Estate Performing Nonperforming Total Consumer Real Estate Other Consumer Performing Nonperforming Total Other Consumer Performing Nonperforming Total Loan Balance $ 334,086 $ — 334,086 457,828 — 457,828 132,813 — 132,813 296,327 30 296,357 120,736 — 120,736 18,864 — 18,864 459,799 $ 16,404 476,203 417,944 $ — 417,944 313,465 $ 6,675 320,140 394,972 $ 20,212 415,184 722,782 $ 57,778 780,560 47,830 $ — 47,830 — $ — — 2,690,879 101,070 2,791,947 214,144 1,313 215,457 230,907 — 230,907 156,164 309 156,473 122,315 229 122,544 13,162 — 13,162 143,706 1,584 145,290 63,535 — 63,535 126,432 1,818 128,250 69,225 706 69,931 6,784 — 6,784 69,411 12,838 82,249 2,921 — 2,921 90,414 949 91,363 63,647 1,486 65,133 3,395 — 3,395 28,426 62 28,488 6,346 — 6,346 80,106 2,096 82,202 74,690 1,564 76,254 2,082 — 2,082 220,701 908 221,609 16,393 384 16,777 286,970 11,809 298,779 245,331 5,716 251,047 3,958 96 4,054 408,350 281 408,631 12,778 — 12,778 105,494 55 105,549 438,702 318 439,020 27,391 — 27,391 — — — — — — 1,542,566 16,985 1,559,552 465,692 384 466,077 1,037 57 1,094 1,142,944 17,123 1,160,067 21,572 1,096 22,667 1,156,216 11,116 1,167,332 5,153 — 5,153 80,789 96 80,885 1,360,654 30 $ 1,360,684 $ 1,196,491 18,254 1,214,746 $ 827,625 4,108 831,734 $ 543,253 21,948 565,201 $ 586,622 23,934 610,556 $ 1,496,135 76,691 1,572,826 $ 1,040,544 654 1,041,199 $ 27,762 1,153 28,914 $ 7,079,086 146,774 7,225,860 The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented: (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Business banking Consumer real estate Other consumer Total Current 2,690,877 1,542,567 462,094 1,140,581 1,153,028 80,583 7,069,730 $ $ $ $ 30-59 Days Past Due — — 19 1,614 1,087 168 2,888 $ $ 60-89 Days Past Due — — 3,580 379 1,968 37 5,965 December 31, 2020 (2) 90 Days + Past (1) Due $ $ — — — 371 132 — 503 $ $ Non- performing 101,070 16,985 384 17,122 11,117 96 146,774 $ $ Total Past Due Loans 101,070 16,985 3,983 19,486 14,304 302 156,130 Total Loans 2,791,947 1,559,552 466,077 1,160,067 1,167,332 80,885 7,225,860 $ $ (1) (2) Represents acquired loans that were recorded at fair value at the acquisition date and remain performing at December 31, 2020. We had 52 loans that were modified totaling $195.6 million under the CARES Act at December 31, 2020. These customers were not considered past due as a result of their delayed payments. Upon exiting the loan modification deferral program, the measurement of loan delinquency will resume where it left off upon entry into the program. Due to the modification program, this delinquency table may not accurately reflect the credit risk associated with these loans. 109 Table of Contents Note 9. ALLOWANCE FOR CREDIT LOSSES - continued (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Business banking Consumer real estate Other consumer Total December 31, 2019 Current 3,025,505 1,466,460 367,204 830,735 1,283,591 81,866 7,055,361 $ $ $ $ 30-59 Days Past Due 7,749 126 956 5,093 2,620 1,448 17,992 $ $ 60-89 Days Past Due 71 1,589 1,163 1,099 1,758 305 5,985 90 Days + Past Due 911 1,443 — — 1,175 228 3,757 $ $ Non- performing 25,356 10,911 737 9,863 6,063 1,127 54,057 $ $ $ $ Total Past Due Loans 34,087 14,069 2,856 16,055 11,616 3,108 81,791 Total Loans 3,059,592 1,480,529 370,060 846,790 1,295,207 84,974 7,137,152 $ $ The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan: (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Business banking Consumer real estate Other consumer Total December 31, 2020 December 31, 2020 For the twelve months ended Beginning of Period Nonaccrual End of Period Nonaccrual Nonaccrual With No Related Allowance Past Due 90+ Days Still Accruing Interest Income Recognized on Nonaccrual (1) $ $ 25,356 10,911 737 9,863 6,063 1,127 54,057 $ $ 101,070 16,985 384 17,122 11,117 96 146,774 $60,401 6,436 285 3,890 398 — $71,410 $ $ — — — 371 132 — 503 (1) Represents only cash payments received and applied to interest on nonaccrual loans. The following table presents collateral-dependent loans by class of loan: (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Business banking Consumer real estate Total Real Estate Blanket Lien Investment/Cash Other December 31, 2020 Type of Collateral $100,450 1,040 3,552 3,085 398 $108,525 $— 15,080 — 1,619 — $16,699 $— — — — — $— The following table presents activity in the ACL for year ended December 31, 2020: (dollars in thousands) Allowance for credit losses on loans: Balance at beginning of period Impact of CECL adoption Provision for credit losses on loans Charge-offs Recoveries Net (Charge-offs)/Recoveries Balance at End of Period Commercial Real Estate Commercial and Industrial (2) Commercial Construction Business (1) Banking Consumer Real Estate Other Consumer Total Loans Twelve Months Ended December 31, 2020 $ $ 30,577 4,810 56,489 (26,460) 240 (26,220) 65,656 $ $ 15,681 7,853 65,288 (74,282) 1,560 (72,722) 16,100 $ $ 7,900 (3,376) 2,986 (454) 183 (271) 7,239 $ $ — 12,898 5,303 (2,612) 328 (2,284) 15,917 $ $ 6,337 4,525 (368) (667) 187 (480) 10,014 $ $ 1,729 636 1,723 (1,890) 488 (1,402) 2,686 $ $ 62,224 27,346 131,421 (106,365) 2,986 (103,379) 117,612 (1) In connection with our adoption of ASU 2016-13, we made changes to our loan portfolio segments to align with the methodology applied in determining the 110 $22 101 — 275 423 4 $826 $— — — 689 — $689 Table of Contents Note 9. ALLOWANCE FOR CREDIT LOSSES - continued allowance under CECL. Our new segmentation breaks out business banking loans from our other loan segments: CRE, C&I, commercial construction, consumer real estate and other consumer. The business banking allowance balance at the beginning of period is included in the other segments and reclassified to business banking through the impact of CECL adoption line. (2) During the three months ended June 30, 2020, we experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme. The adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments resulted in an increase to our ACL of $27.4 million on January 1, 2020. The increase included $8.2 million for S&T legacy loans and $9.3 million for acquired loans from the DNB merger. We also recorded a day one adjustment of $9.9 million primarily related to a C&I relationship that was charged off in the first quarter of 2020. We obtained information on the relationship subsequent to filing our December 31, 2019 10-K, but before the end of the first quarter of 2020. The updated information supported a loss existed at January 1, 2020. We recognized a charge-off of $58.7 million related to a customer fraud from a check kiting scheme during the second quarter of 2020. The fraud was perpetrated by a single business customer and the customer has plead guilty in an ongoing criminal investigation. We continue to pursue all available sources of recovery to mitigate the loss. The customer also had a lending relationship of $14.8 million, including a $14.0 million commercial real estate loan and an $0.8 million line of credit which resulted in an additional $8.9 million charge-off in 2020. At December 31, 2020, $5.9 million remains outstanding as a nonperforming loan that has been fully charged down to the estimated sale price of the collateral. The impact of COVID-19 was captured in our quantitative reserve as certain impacted loans were downgraded to special mention and substandard and in our qualitative reserve through our economic forecast and other qualitative adjustments. Commercial special mention, substandard and doubtful loans increased $281 million to $571 million compared to $290 million at December 31, 2019, with an increase of $162 million in substandard loans, $113 million in special mention loans and $11.4 million in doubtful loans. The increase in both special mention and substandard loans was mainly due to downgrades in our hotel portfolio. Specific reserves on loans individually assessed increased $11.3 million to $13.5 million compared to $2.2 million in 2019. Included in the $13.5 million of specific reserves was $6.7 million for loans in our hotel portfolio. Specific reserves for hotels were based on liquidation values from appraisals received in the fourth quarter of 2020. Our qualitative reserve increased $14.1 million in 2020 which included $8.6 million for the economic forecast, $3.2 million for portfolio allocations made in our hotel, business banking and C&I portfolios due to the COVID-19 pandemic, and $2.3 million for current conditions. The change in reserve attributed to the economic forecast reflected reductions in the second and third quarters due to an improved economic forecast. Our forecast covers a period of two years and is driven primarily by national unemployment data. The change attributed to the portfolio allocations was primarily due to $3.0 million of ACL added for our business banking portfolio. The C&I portfolio included $465.0 million of loans originated under the PPP at December 31, 2020. The loans are 100 percent guaranteed by the SBA, therefore, we have not assigned any ACL to these loans at December 31, 2020. Prior to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, we calculated our allowance for loan losses using an incurred loan loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods. The following table presents the recorded investment in commercial loan classes by internally assigned risk ratings as of the date presented: (dollars in thousands) Pass Special mention Substandard Doubtful Total Commercial Real Estate 3,270,437 57,285 86,772 2,023 3,416,518 $ $ $ % of Total 95.7 % 1.7 % 2.5 % 0.1 % 100.0 % $ Commercial and Industrial 1,636,314 36,484 47,980 55 1,720,833 December 31, 2019 $ % of Total 95.1 % 2.1 % 2.8 % — % 100.0 % $ Commercial Construction 347,324 10,109 17,899 133 375,445 % of Total 92.5 % 2.7 % 4.8 % — % $ 100.0 % $ Total 5,254,056 103,878 152,651 2,211 5,512,796 % of Total 95.3 % 1.9 % 2.8 % — % 100.0 % 111 Table of Contents Note 9. ALLOWANCE FOR CREDIT LOSSES - continued The following table presents the recorded investment in consumer loan classes by performing and nonperforming status as of the date presented: (dollars in thousands) Performing Nonperforming Total Residential Mortgage 991,066 7,519 998,585 $ $ % of Total 99.2 % $ 0.8 % 100.0 % $ Home Equity 535,709 2,639 538,348 % of Total 99.5 % $ 0.5 % 100.0 % $ Installment and other consumer 78,993 40 79,033 % of Total 99.9 % $ 0.1 % 100.0 % $ Consumer Construction 8,390 — 8,390 % of Total 100.0 % $ — % 100.0 % $ Total 1,614,158 10,198 1,624,356 % of Total 99.4 % 0.6 % 100.0 % December 31, 2019 The following table presents investments in loans considered to be impaired and related information on those impaired loans as of December 31, 2019: (dollars in thousands) With a related allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total with a Related Allowance Recorded Without a related allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total without a Related Allowance Recorded Total: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total December 31, 2019 Unpaid Principal Balance Recorded Investment Related Allowance $ $ 13,011 10,001 489 — 9 23,510 34,909 7,605 1,425 7,884 4 51,827 47,920 17,606 1,914 7,884 13 75,337 $ $ 14,322 10,001 489 — 9 24,821 40,201 10,358 2,935 8,445 11 61,950 54,523 20,359 3,424 8,445 20 86,771 $ $ 2,023 55 113 — 9 2,200 — — — — — — 2,023 55 113 — 9 2,200 112 Table of Contents Note 9. ALLOWANCE FOR CREDIT LOSSES - continued The following table summarizes average recorded investment and interest income recognized on loans considered to be impaired for the year presented: (dollars in thousands) With a related allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total with a Related Allowance Recorded Without a related allowance recorded: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total without a Related Allowance Recorded Total: Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total The following table details activity in the ALL for the period presented: (dollars in thousands) Balance at beginning of year Charge-offs Recoveries Net (Charge-offs) Provision for loan losses Balance at End of Year Commercial Real Estate 33,707 (3,664) 137 (3,527) 397 30,577 Commercial and Industrial 11,596 (8,928) 1,388 (7,540) 11,625 15,681 $ $ $ $ $ $ 2019 Commercial Construction 7,983 (406) 5 (401) 318 7,900 $ $ Consumer Real Estate 6,187 (1,353) 637 (716) 866 6,337 $ $ Other Consumer 1,523 (1,838) 377 (1,461) 1,667 1,729 Loans acquired in the DNB merger were recorded at fair value of $909.0 million with no carryover of the related ALL. The following table presents the ALL and recorded investments in loans by category as of December 31: (dollars in thousands) Commercial real estate Commercial and industrial Commercial construction Consumer real estate Other consumer Total Allowance for Loan Losses Individually Evaluated for Impairment 2,023 55 113 — 9 2,200 $ $ Collectively Evaluated for Impairment 28,554 15,626 7,787 6,337 1,720 60,024 $ $ $ $ 2019 Individually Evaluated for Impairment 47,920 17,606 1,914 7,884 13 75,337 $ $ Portfolio Loans Collectively Evaluated for Impairment 3,368,598 1,703,227 373,531 1,537,439 79,020 7,061,815 $ $ Total 30,577 15,681 7,900 6,337 1,729 62,224 $ $ $ $ 113 For the Year Ended December 31, 2019 Average Recorded Investment Interest Income Recognized $ $ 14,018 10,135 489 — 13 24,655 35,739 5,565 1,831 8,190 7 51,332 49,757 15,700 2,320 8,190 20 75,987 $ $ — 576 — — 1 577 943 368 131 397 — 1,839 943 944 131 397 1 2,416 Total 60,996 (16,189) 2,544 (13,645) 14,873 62,224 Total 3,416,518 1,720,833 375,445 1,545,323 79,033 7,137,152 NOTE 10. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES We have 51 lease contracts, including 48 operating leases and three finance leases. These leases are for our branch, loan production and support services facilities. Included in the lease expense for premises are leases with one S&T director, which totaled approximately $0.2 million for each of the three years 2020, 2019 and 2018. The following table presents our lease expense for finance and operating leases for the years ended December 31: (dollars in thousands) Operating lease expense Amortization of ROU assets - finance leases (1) Interest on lease liabilities - finance leases Total Lease Expense (1) $ $ 2020 5,711 224 84 6,019 $ $ 2019 4,221 101 74 4,396 $ $ 2018 3,850 44 11 3,905 Included in borrowings interest expense in our Consolidated Statements of Net Income. All other lease costs in this table are included in net occupancy expense. The following table presents our ROU assets, weighted average term and the discount rates for finance and operating leases as of December 31: (dollars in thousands) Operating Leases ROU assets Operating cash flows Finance Leases ROU assets Operating cash flows Financing cash flows Weighted Average Lease Term - Years Operating leases Finance leases Weighted Average Discount Rate Operating leases Finance leases $ $ $ $ $ 2020 2019 $ $ $ $ $ 46,245 6,489 1,278 84 180 18.70 12.09 5.90 % 5.81 % 47,686 5,028 1,513 47 57 19.18 12.16 5.94 % 5.73 % Leases acquired from the DNB merger were remeasured at the acquisition date resulting in a ROU asset of $10.9 million at December 31, 2019. As of December 31, 2020, two operating leases were considered abandoned due to branch closures and the right-of-use asset values were reduced by $0.5 million to zero and the related liabilities were reduced by $0.2 million. We recognized additional expense of $0.3 million at the date of abandonment for these two leases. The following table presents the maturity analysis of lease liabilities for finance and operating leases as of December 31, 2020: (dollars in thousands) Maturity Analysis 2021 2022 2023 2024 2025 Thereafter Total Less: Present value discount Lease Liabilities Finance 269 225 129 130 132 1,145 2,030 (636) 1,394 $ $ Operating 4,789 4,855 4,759 4,752 4,787 66,409 90,351 (38,402) 51,949 $ $ Total 5,058 5,080 4,888 4,882 4,919 67,554 92,381 (39,038) 53,343 $ $ 114 Table of Contents NOTE 11. PREMISES AND EQUIPMENT The following table is a summary of premises and equipment as of the dates presented: (dollars in thousands) Land Premises Furniture and equipment Leasehold improvements Accumulated depreciation Total December 31, 2020 2019 $ $ 8,651 61,299 45,072 12,061 127,083 (71,469) 55,614 $ $ 9,018 60,767 41,713 11,290 122,788 (65,848) 56,940 Certain banking facilities are leased under finance leases and are included in total premises and equipment. We have one right-of-use asset for land in the amount of $0.2 million and two right-of use assets for buildings totaling $1.1 million. Additional information relating to leased right-of-use assets is included in Note 10 Right-of-Use Assets and Lease Liabilities. Depreciation expense related to premises and equipment was $6.7 million in 2020, $5.4 million in 2019 and $5.0 million in 2018. 115 Table of Contents NOTE 12. GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents goodwill as of the dates presented: (dollars in thousands) Balance at beginning of year Additions Balance at End of Year December 31, 2020 2019 $ $ 371,621 1,803 373,424 $ $ 287,446 84,175 371,621 Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Additional goodwill of $1.8 million and $84.2 million was recorded during 2020 and 2019 related to our acquisition of DNB. Refer to Note 2 Business Combinations for further details on the DNB merger. Goodwill is reviewed for impairment annually or more frequently if it is determined that a triggering event has occurred. In response to the current economic environment as a result of the COVID-19 pandemic, we completed an interim quantitative goodwill impairment analysis as of August 31, 2020 and updated this analysis as of October 1, 2020, our annual goodwill impairment evaluation date. Additionally, we completed an interim quantitative goodwill impairment analysis as of November 30, 2020 and updated this analysis as of December 31, 2020. Based upon our impairment analysis, we determined that our goodwill of $373.4 million was not impaired at December 31, 2020. The following table presents a summary of intangible assets as of the dates presented: (dollars in thousands) Gross carrying amount at beginning of year Additions Accumulated amortization Balance at End of Year December 31, 2020 2019 $ $ 31,052 288 (22,665) 8,675 $ $ 21,898 9,154 (20,133) 10,919 Intangible assets of $8.7 million at December 31, 2020 relate to core deposit and wealth management customer relationships resulting from acquisitions. The $0.3 million addition during 2020 related to acquired wealth management customer relationships. We determined the amount of identifiable intangible assets for our core deposits based upon an independent valuation. Other intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. There were no triggering events in 2020 requiring an impairment analysis to be completed. Amortization expense on finite-lived intangible assets totaled $2.5 million, $0.8 million and $0.9 million for 2020, 2019 and 2018. The following is a summary of the expected amortization expense for finite-lived intangible assets, assuming no new additions, for each of the five years following December 31, 2020 and thereafter: (dollars in thousands) 2021 2022 2023 2024 2025 Thereafter Total Amount 1,780 1,518 1,319 1,151 820 2,087 8,675 $ $ 116 Table of Contents NOTE 13. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The following table indicates the amounts representing the value of derivative assets and derivative liabilities at December 31: (dollars in thousands) Derivatives not Designated as Hedging Instruments Interest Rate Swap Contracts—Commercial Loans Fair value Notional amount Collateral posted Interest Rate Lock Commitments—Mortgage Loans Fair value Notional amount Forward Sale Contracts—Mortgage Loans Fair value Notional amount Derivatives (included in Other Assets) Derivatives (included in Other Liabilities) 2020 2019 2020 2019 $ 78,319 983,638 — 2,900 51,053 — — $ $ 25,647 740,762 — 321 9,829 1 12,750 79,033 983,638 77,930 — — 385 47,062 $ 25,615 740,762 26,127 — — — — Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted. For example, we may have a derivative asset and a derivative liability with the same counterparty to a swap transaction and are permitted to offset the asset position and the liability position resulting in a net presentation. The following table indicates the gross amounts of commercial loan swap derivative assets and derivative liabilities, the amounts offset and the carrying values in the Consolidated Balance Sheets at December 31: (dollars in thousands) Derivatives not Designated as Hedging Instruments Gross amounts recognized Gross amounts offset Net amounts presented in the Consolidated Balance Sheets Gross amounts not offset (1) Net Amount (1) Amounts represent collateral posted for the periods presented. Derivatives (included in Other Assets) Derivatives (included in Other Liabilities) 2020 2019 2020 2019 $ $ 82,655 (4,336) 78,319 — 78,319 $ $ 26,146 (499) 25,647 — 25,647 $ $ 82,626 (3,593) 79,033 (77,930) 1,103 $ $ $ $ 26,114 (499) 25,615 (26,127) (512) 2018 145 25 60 230 The following table indicates the gain or loss recognized in income on derivatives for the years ended December 31: (dollars in thousands) Derivatives not Designated as Hedging Instruments Interest rate swap contracts—commercial loans Interest rate lock commitments—mortgage loans Forward sale contracts—mortgage loans Total Derivative (Loss)/Gain 2020 (746) 1,715 478 1,447 $ $ $ $ 2019 (132) 70 (54) (116) 117 NOTE 14. MORTGAGE SERVICING RIGHTS For the years ended December 31, 2020, 2019 and 2018, the 1-4 family mortgage loans that were sold to Fannie Mae amounted to $345.1 million, $94.5 million and $79.3 million. At December 31, 2020, 2019 and 2018 our servicing portfolio totaled $718.2 million, $509.2 million and $473.7 million. The following table indicates MSRs and the net carrying values: (dollars in thousands) Balance at December 31, 2018 Additions Amortization Temporary recapture Balance at December 31, 2019 Additions Amortization Temporary (impairment) Balance at December 31, 2020 Servicing Rights 4,518 1,086 (665) — 4,939 2,887 (1,206) — 6,620 $ $ $ Valuation Allowance (54) — — (223) (277) — — (1,354) (1,631) Net Carrying Value 4,464 1,086 (665) (223) 4,662 2,887 (1,206) (1,354) 4,989 $ $ $ $ $ $ NOTE 15. QUALIFIED AFFORDABLE HOUSING As part of our responsibilities under the Community Reinvestment Act and due to their favorable federal income tax benefits, we invest in Low Income Housing partnerships, or LIHPs. As a limited partner in these operating partnerships, we receive tax credits and tax deductions for losses incurred by the underlying properties. Our maximum exposure to loss associated with these investments consists of the investments' fair value plus any unfunded commitments as well as the denial of the tax credits if the project is deemed non-compliant. We do not have any loss reserves recorded related to these investments because we believe the likelihood of any loss to be remote. Our investments in LIHPs represent unconsolidated variable interest entities, or VIEs, and the assets and liabilities of the partnerships are not recorded on our Consolidated Balance Sheets. We have determined that we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact the economic performance of the partnership and have both the obligation to absorb expected losses and the right to receive benefits. Our total investment in qualified affordable housing projects was $8.4 million at December 31, 2020 and $4.8 million at December 31, 2019. Amortization expense was $3.2 million, $2.6 million and $2.7 million as of December 31, 2020, 2019 and 2018. The amortization expense was offset by tax credits of $2.2 million, $4.2 million and $3.4 million as of December 31, 2020, 2019 and 2018 as a reduction to our federal tax provision. On September 11, 2019, we entered into a new qualified affordable housing project and committed to an investment of $10.2 million. As of December 31, 2020, we have invested $7.1 million in this new project. No amortization expense or tax credits will be recognized for this new project until it is complete. 118 NOTE 16. DEPOSITS The following table presents the composition of deposits at December 31 and interest expense for the years ended December 31: (dollars in thousands) Noninterest-bearing demand Interest-bearing demand Money market Savings Certificates of deposit Total 2020 2019 2018 Balance 2,261,994 864,510 1,937,063 969,508 1,387,463 7,420,538 $ $ $ $ Interest Expense — 2,681 11,645 972 20,688 35,986 $ $ Balance 1,698,082 962,331 1,949,811 830,919 1,595,433 7,036,576 $ $ Interest Expense — 3,915 30,236 1,928 26,947 63,026 $ $ Balance 1,421,156 573,693 1,482,065 784,970 1,412,038 5,673,922 $ $ Interest Expense — 93 20,018 1,773 18,972 40,856 The aggregate of all certificates of deposits over $100,000, including brokered CDs, was $688.4 million and $754.8 million at December 31, 2020 and 2019. Certificates of deposits over $250,000, including brokered CDs, were $329.7 million and $347.5 million at December 31, 2020 and 2019. The following table indicates the scheduled maturities of certificates of deposit at December 31, 2020: (dollars in thousands) 2021 2022 2023 2024 2025 Thereafter Total Amount 1,182,938 122,596 27,825 17,415 33,149 3,540 1,387,463 $ $ 119 NOTE 17. SHORT-TERM BORROWINGS Short-term borrowings are for terms under or equal to one year and are comprised of securities sold under REPOs and FHLB advances. All REPOs are overnight short-term investments and are not insured by the Federal Deposit Insurance Corporation, or FDIC. Securities pledged as collateral under these REPO financing arrangements cannot be sold or repledged by the secured party and, therefore, the REPOs are accounted for as secured borrowings. Mortgage-backed securities with amortized cost of $65.1 million and carrying value of $68.4 million at December 31, 2020 and amortized cost of $22.7 million and carrying value of $23.0 million at December 31, 2019 were pledged as collateral for these secured transactions. The pledged securities are held in safekeeping at the Federal Reserve. Due to the overnight short-term nature of REPOs, potential risk due to a decline in the value of the pledged collateral is low. Collateral pledging requirements with REPOs are monitored daily. FHLB advances are for various terms and are secured by a blanket lien on residential mortgages and other real estate secured loans. The following table presents the composition of short-term borrowings, the weighted average interest rate as of December 31 and interest expense for the years ended December 31: (dollars in thousands) REPOs FHLB advances Total Short-term Borrowings Balance 65,163 75,000 140,163 $ $ 2020 Weighted Average Interest Rate 0.25 % $ 0.19 % 0.22 % $ Interest Expense 169 1,434 1,603 Balance 19,888 281,319 301,207 $ $ 2019 Weighted Average Interest Rate 0.74 % $ 1.84 % 1.76 % $ Interest Expense 110 6,416 6,526 Balance 18,383 470,000 488,383 $ $ 2018 Weighted Average Interest Rate 0.46 % $ 2.65 % 2.57 % $ Interest Expense 222 11,082 11,304 120 NOTE 18. LONG-TERM BORROWINGS AND SUBORDINATED DEBT Long-term borrowings are for original terms greater than one year and are comprised of FHLB advances, capital leases and junior subordinated debt securities. Our long-term borrowings at the Pittsburgh FHLB were $22.3 million as of December 31, 2020 and $49.3 million as of December 31, 2019. Long-term FHLB advances are secured by the same loans as short-term FHLB advances. Total loans pledged as collateral at the FHLB were $4.1 billion at December 31, 2020. We were eligible to borrow up to an additional $2.5 billion based on qualifying collateral and up to a maximum borrowing capacity of $2.9 billion at December 31, 2020. The following table represents the balance of long-term borrowings, the weighted average interest rate as of December 31 and interest expense for the years ended December 31: (dollars in thousand) Long-term borrowings Weighted average interest rate Interest expense 2020 2019 2018 $ $ 23,681 2.03 % 1,201 $ $ 50,868 2.60 % 1,831 $ $ 70,314 2.84 % 1,129 Scheduled annual maturities and average interest rates for all of our long-term debt for each of the five years subsequent to December 31, 2020 and thereafter are as follows: (dollars in thousands) 2021 2022 2023 2024 2025 Thereafter Total Junior Subordinated Debt Securities Balance 1,251 7,689 464 13,381 80 816 23,681 $ $ Average Rate 3.67 % 2.27 % 5.72 % 1.35 % 5.82 % 6.02 % 2.03 % The following table represents the composition of junior subordinated debt securities at December 31 and the interest expense for the years ended December 31: (dollars in thousands) Junior subordinated debt Junior subordinated debt—trust preferred securities Total 2020 Balance 34,750 29,333 64,083 $ $ $ $ Interest Expense 1,007 1,279 2,286 $ $ 2019 Balance 34,753 29,524 64,277 $ $ Interest Expense 1,059 1,251 2,310 $ $ 2018 Balance 25,000 20,619 45,619 $ $ Interest Expense 951 1,149 2,100 The following table summarizes the key terms of our junior subordinated debt securities: (dollars in thousands) Junior Subordinated Debt Trust Preferred Securities Stated Maturity Date Optional redemption date at par Regulatory Capital 2001 Trust Preferred Securities $— 5,155 7/25/2031 Any time after 7/25/2011 Tier 1 2005 Trust Preferred Securities $— 4,124 5/23/2035 Any time after 5/23/2010 Tier 1 Interest Rate Interest Rate at December 31, 2020 6 Month LIBOR plus 375 bps 4.06% 3 Month LIBOR plus 177 bps 1.98% 2015 Junior Subordinated Debt $9,750 — 3/6/2025 Quarterly after 4/1/2020 Tier 2 fixed at 4.25% until 4/1/2020 then prime plus 100 bps 4.25% 2006 Junior Subordinated Debt $25,000 — 12/15/2036 Any time after 9/15/2011 Tier 2 2008 Trust Preferred Securities $— 20,619 3/15/2038 Any time after 3/15/2013 Tier 1 3 month LIBOR plus 160 bps 1.82% 3 month LIBOR plus 350 bps 3.72% 121 Table of Contents NOTE 18. LONG-TERM BORROWINGS AND SUBORDINATED DEBT - continued 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. 122 NOTE 19. COMMITMENTS AND CONTINGENCIES Commitments In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties. The following table sets forth our commitments and letters of credit as of the dates presented: (dollars in thousands) Commitments to extend credit Standby letters of credit Total $ $ December 31, 2020 2,185,752 89,095 2,274,847 $ $ 2019 1,910,805 80,040 1,990,845 Allowance for Credit Losses on Unfunded Loan Commitments We maintain an ACL on unfunded commercial and consumer lending commitments and letters of credit to provide for the risk of loss in these arrangements. The activity in the unfunded loan commitments reserve is summarized as of the dates presented: (dollars in thousands) Balance at beginning of period Impact of adopting ASU 2016-13 at January 1, 2020 Balance after adoption of ASU 2016-13 Provision for credit losses Total December 31, 2020 $ $ 3,112 1,349 4,461 6 4,467 December 31, 2019 $ $ 2,139 — 2,139 973 3,112 The increase in the reserve for unfunded commitments at December 31, 2020 was primarily related to the adoption of ASU 2016-13 on January 1, 2020. Litigation In the normal course of business, we are subject to various legal and administrative proceedings and claims. While any type of litigation contains a level of uncertainty, we believe that the outcome of such proceedings or claims pending will not have a material adverse effect on our consolidated financial position or results of operations. 123 NOTE 20. REVENUE FROM CONTRACTS WITH CUSTOMERS The information presented in the following table presents the point of revenue recognition for revenue from contracts with customers. Other revenue streams are excluded such as: interest income, net securities gains and losses, insurance, mortgage banking and other revenues that are accounted for under other GAAP. (dollars in thousands) Revenue Streams Service charges on deposit accounts (1) Debit and credit card Wealth management Other fee revenue Point of Revenue Recognition Over a period of time At a point in time Over a period time At a point in time Over a period of time At a point in time At a point in time Years ended December 31, 2020 2019 2018 $ $ $ $ $ $ $ 1,797 9,907 11,704 738 14,355 15,093 7,919 2,038 9,957 3,722 $ $ $ $ $ $ $ 1,859 11,457 13,316 723 12,682 13,405 6,939 1,684 8,623 3,836 $ $ $ $ $ $ $ 1,972 11,124 13,096 657 12,022 12,679 7,113 2,971 10,084 3,854 (1) Refer to Note 1 Summary of Significant Accounting Policies for the types of revenue streams that are included within each category. 124 NOTE 21. INCOME TAXES The following table presents the composition of income tax (benefit) expense for the years ended December 31: (dollars in thousands) Federal Current Deferred Total Federal State Current Deferred Total State Total Federal and State 2020 4,256 (4,273) (17) 145 (129) 16 (1) $ $ 2019 18,918 (406) 18,512 589 25 614 19,126 $ $ 2018 13,616 3,517 17,133 720 (8) 712 17,845 $ $ The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. We ordinarily generate an annual effective tax rate that is less than the statutory rate of 21 percent primarily due to benefits resulting from certain partnership investments, such as low income housing and historic rehabilitation projects, tax-exempt interest, excludable dividend income and tax-exempt income on BOLI. The state tax provision is due to taxable business activities conducted at our loan production office in New York. On December 22, 2017, H.R.1, originally known as the Tax Cuts and Jobs Act, or Tax Act, was signed into law. The Tax Act resulted in significant changes to the U.S. corporate tax system including a federal corporate rate reduction from 35 percent to 21 percent. The Tax Act also established new tax laws that became effective January 1, 2018. GAAP requires us to record the effects of a tax law change in the period of enactment. As a result, in 2017 we re-measured our deferred tax assets and liabilities and recorded a provisional adjustment of $13.4 million. This re-measurement adjustment was recognized as an increase to our income tax expense in the fourth quarter of 2017. The calculation over the income tax effects of the Tax Act was completed in the third quarter of 2018. We recognized a $3.0 million income tax benefit as a result of finalizing the calculation. The following table presents a reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31: Statutory tax rate Low income housing tax credits Tax-exempt interest Bank owned life insurance Gain on sale of a majority interest of insurance business Merger related expenses Other Impact of the Tax Act Effective Tax Rate 2020 21.0 % (11.1) % (11.9) % (1.8) % — % — % 3.8 % — % — % 2019 21.0 % (3.3) % (2.1) % (0.4) % — % 0.3 % 0.8 % — % 16.3 % 2018 21.0 % (2.5) % (2.1) % (0.4) % 0.7 % — % 0.3 % (2.5) % 14.5 % 125 Table of Contents NOTE 21. INCOME TAXES -- continued The following table presents significant components of our temporary differences as of the dates presented: (dollars in thousands) Deferred Tax Assets: Allowance for credit losses Lease liabilities State net operating loss carryforwards Net adjustment to funded status of pension Low income housing partnerships Other employee benefits Other Gross Deferred Tax Assets Less: Valuation allowance Total Deferred Tax Assets Deferred Tax Liabilities: Right-of-use lease assets Net unrealized gains on securities available-for-sale Deferred loan income Prepaid pension Purchase accounting adjustments Depreciation on premises and equipment Other Total Deferred Tax liabilities Net Deferred Tax Asset December 31, 2020 26,051 11,368 5,489 4,692 3,996 2,050 3,798 57,444 (5,489) 51,955 (10,141) (7,125) (6,796) (5,209) (1,971) (1,275) (1,245) (33,762) 18,193 $ $ 2019 13,798 11,257 5,134 5,438 3,494 3,039 1,856 44,016 (5,134) 38,882 (10,476) (2,570) (3,555) (5,971) (1,269) (592) (1,243) (25,676) 13,206 $ $ We establish a valuation allowance when it is more likely than not that we will not be able to realize the benefit of the deferred tax assets. Except for Pennsylvania net operating losses, or NOLs, we have determined that no valuation allowance is needed for deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and through future taxable income. The valuation allowance is reviewed quarterly and adjusted based on management’s assessments of realizable deferred tax assets. Gross deferred tax assets were reduced by a valuation allowance of $5.5 million in 2020 and $5.1 million in 2019 related to Pennsylvania income tax NOLs. The Pennsylvania NOL carryforwards total $54.9 million and will expire in the years 2021-2041. Unrecognized Tax Benefits The following table reconciles the change in Federal and State gross unrecognized tax benefits, or UTB, for the years ended December 31: (dollars in thousands) Balance at beginning of year Prior period tax positions Current period tax positions Balance at End of Year Amount That Would Impact the Effective Tax Rate if Recognized $ $ $ 2020 1,051 (18) 244 1,277 1,027 $ $ $ 2019 768 (10) 293 1,051 848 $ $ $ 2018 909 (251) 110 768 607 We classify interest and penalties as an element of tax expense. We monitor changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. As of December 31, 2020, no significant changes to UTB are projected; however, tax audit examinations are possible. As of December 31, 2020, all income tax returns filed for the tax years 2017 - 2019 remain subject to examination by the Internal Revenue Service. The Bank's income tax returns for the audit years, January 1, 2016 through December 31, 2018 are currently under audit by the New York Department of Taxation. This audit has remained open as of December 31, 2020. 126 NOTE 22. TAX EFFECTS ON OTHER COMPREHENSIVE INCOME (LOSS) The following tables present the tax effects of the components of other comprehensive income (loss) for the years ended December 31: (dollars in thousands) 2020 Net change in unrealized gains on debt securities available-for sale Net available-for-sale securities (gains) losses reclassified into earnings Adjustment to funded status of employee benefit plans Other Comprehensive Income 2019 Net change in unrealized gains on securities available-for-sale Net available-for-sale securities (gains) losses reclassified into earnings Adjustment to funded status of employee benefit plans Other Comprehensive Income 2018 Net change in unrealized losses on securities available-for-sale Net available-for-sale securities (gains) losses reclassified into earnings Adjustment to funded status of employee benefit plans Other Comprehensive Loss (1) Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount $ $ $ $ $ $ 22,683 — 3,549 26,232 15,793 26 (1,282) 14,537 (6,794) — 6,297 (497) $ $ $ $ $ $ (4,827) — (764) (5,591) (3,367) (6) 273 (3,100) 1,449 — (1,343) 106 $ $ $ $ $ $ 17,856 — 2,785 20,641 12,426 20 (1,009) 11,437 (5,345) — 4,954 (391) Due to the adoption of ASU No. 2016-01, net unrealized gains on marketable equity securities were reclassified from accumulated other comprehensive income to retained earnings during the (1) three months ended March 31, 2018. 127 NOTE 23. EMPLOYEE BENEFITS We maintain a qualified defined benefit pension plan, or Plan, covering substantially all employees hired prior to January 1, 2008. The benefits are based on years of service and the employee’s compensation for the highest five consecutive years in the last ten years through March 31, 2016 when the Plan was frozen. Contributions are intended to provide for benefits attributed to employee service to date and for those benefits expected to be earned in the future. Our qualified and nonqualified defined benefit plans were amended to freeze benefit accruals for all persons entitled to benefits under the plan in 2016. We will continue recording pension expense related to these plans, primarily representing interest costs on the accumulated benefit obligation and amortization of actuarial losses accumulated in the plan, as well as income from expected investment returns on pension assets. Since the plans have been frozen, no service costs are included in net periodic pension expense. The expected long-term rate of return on plan assets is 3.45 percent. The following table summarizes the activity in the benefit obligation and Plan assets deriving the funded status: (dollars in thousands) Change in Projected Benefit Obligation Projected benefit obligation at beginning of year Interest cost Actuarial gain/(loss) Acquisitions - DNB merger Benefits paid Projected Benefit Obligation at End of Year Change in Plan Assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Acquisitions - DNB merger Benefits paid Fair Value of Plan Assets at End of Year Funded Status The following table sets forth the amounts recognized in accumulated other comprehensive income at December 31: (dollars in thousands) Net actuarial loss Total (Before Tax Effects) 128 2020 2019 113,679 3,456 10,525 — (10,154) 117,506 116,652 15,731 115 — (10,154) 122,344 4,838 $ $ $ $ $ 95,200 3,987 13,996 6,778 (6,282) 113,679 101,765 16,358 — 4,811 (6,282) 116,652 2,973 $ $ $ $ $ 2020 (19,572) 2019 (23,106) $ (19,572) $ (23,106) Table of Contents NOTE 23. EMPLOYEE BENEFITS -- continued Below are the actuarial weighted average assumptions used in determining the benefit obligation: Discount rate Rate of compensation increase (1) 2020 2.48 % - % 2019 3.25 % — % Rate of compensation increase is not applicable for 2020 and 2019 due to the amendment to freeze benefit accruals under the qualified and nonqualified defined benefit pension plans effective (1) March 31, 2016. The following table summarizes the components of net periodic pension cost and other changes in Plan assets and benefit obligations recognized in other comprehensive loss for the years ended December 31: 2020 2019 2018 (dollars in thousands) Components of Net Periodic Pension Cost Interest cost on projected benefit obligation Expected return on plan assets Amortization of prior service credit - DNB merger Recognized net actuarial loss Settlement charge Net Periodic Pension Expense Other Changes in Plan Assets and Benefit Obligation Recognized in Other Comprehensive Income (Loss) Net actuarial loss/(gain) Recognized net actuarial loss Settlement loss recognized Recognized prior service credit Total (Before Tax Effects) Total Recognized in Net Benefit Cost and Other Comprehensive Income/(Loss) (Before Tax Effects) 3,456 (3,925) — 1,419 833 1,783 (1,282) (1,419) (833) — (3,534) (1,751) $ $ $ $ $ $ $ $ $ $ $ $ 3,987 (4,731) 7 1,604 — 867 2,370 (1,604) — — 766 1,633 2019 4.31 % — % 4.80 % 3,882 (6,266) — 2,134 — (250) (3,271) (2,134) — — (5,405) (5,655) 2018 3.75 % — % 7.50 % The following table summarizes the actuarial weighted average assumptions used in determining net periodic pension cost: Discount rate Rate of compensation increase Expected return on assets (1) 2020 3.25 % - % 3.45 % Rate of compensation increase is not applicable for 2020, 2019, and 2018 due to the amendment to freeze benefit accruals under the qualified and nonqualified defined benefit pension plans (1) effective March 31, 2016. The accumulated benefit obligation for the Plan was $117.5 million at December 31, 2020 and $113.7 million at December 31, 2019. We consider many factors when setting the assumed rate of return on Plan assets. As a general guideline the assumed rate of return is equal to the weighted average of the expected returns for each asset category and is estimated based on historical returns as well as expected future returns. The weighted average discount rate is derived from corporate yield curves. S&T Bank’s Retirement Plan Committee determines the investment policy for the Plan. In general, the targeted asset allocation is 5 percent to 15 percent equities and alternatives and 85 percent to 95 percent fixed income. A strategic allocation within each asset class is based on the Plan’s duration, time horizon, risk tolerances, performance expectations, and asset class preferences. Investment managers have discretion to invest in any equity or fixed- income asset class, subject to the securities guidelines of the Plan’s Investment Policy Statement. At this time, S&T Bank is not required to make a cash contribution to the Plan in 2021. 129 Table of Contents NOTE 23. EMPLOYEE BENEFITS -- continued The following table provides information regarding estimated future benefit payments to be paid in each of the next five years and in the aggregate for the five years thereafter: (dollars in thousands) 2021 2022 2023 2024 2025 2026 - 2030 $ Amount 8,200 7,535 7,364 7,548 7,020 32,237 We also have nonqualified supplemental executive pension plans, or SERPs, for certain key employees. The SERPs are unfunded. The projected benefit obligations related to the SERPs were $5.6 million and $5.3 million at December 31, 2020 and 2019. These amounts also represent the net amount recognized in the statement of financial position for the SERPs. Net periodic benefit costs for the SERPs were $0.7 million for the year ended December 31, 2020 and $0.4 million for the year ended December 31, 2019 and 0.5 million for the year ended December 31, 2018. Additionally, $2.4 million before tax was reflected in accumulated other comprehensive income (loss) at December 31, 2020 and 2019 and $1.9 million at December 31, 2018, in relation to the SERPs. Net periodic benefit cost of $0.7 million for the year ended December 31, 2020 included a settlement charge of $0.2 million. The actuarial assumptions used for the SERPs are the same as those used for the Plan. We maintain a Thrift Plan, a qualified defined contribution plan, in which substantially all employees are eligible to participate. We make matching contributions to the Thrift Plan up to 3.5 percent of participants’ eligible compensation and may make additional profit-sharing contributions as provided by the Thrift Plan. Expense related to these contributions amounted to $2.4 million in 2020, $2.0 million in 2019 and $1.7 million in 2018. Fair Value Measurements The following tables present our Plan assets measured at fair value on a recurring basis by fair value hierarchy level at December 31, 2020 and 2019. During the years ended December 31, 2020 and 2019 there were no transfers between Level 1 and Level 2 for items of a recurring basis. There were no purchases or transfers of Level 3 plan assets in 2020 or 2019. (dollars in thousands) Cash and cash equivalents Fixed income Equities: (3) (2) Equity index mutual funds—international Domestic individual equities (5) (4) Total Assets at Fair Value December 31, 2020 Fair Value Asset Classes (1) Level 1 1,563 108,583 3,332 8,866 122,344 $ $ $ $ Level 2 — — — — — $ $ Level 3 — — — — — $ $ Total 1,563 108,583 3,332 8,866 122,344 (1) (2) (3) Refer to Note 1 Summary of Significant Accounting Policies, Fair Value Measurements for a description of levels within the fair value hierarchy. This asset class includes FDIC insured money market instruments. This asset class includes a variety of fixed income mutual funds which primarily invest in investment grade rated securities. Investment managers have discretion to invest in fixed income related securities including futures, options and other derivatives. Investments may be made in currencies other than the U.S. dollar. (4) The sole investment within this asset class is the Vanguard Total International Stock Index Fund Admiral Shares. This asset class includes individual domestic equities invested in an active all-cap strategy. It may also include convertible bonds. (5) 130 Table of Contents NOTE 23. EMPLOYEE BENEFITS -- continued (dollars in thousands) Cash and cash equivalents Fixed income Equities: (3) (2) Equity index mutual funds—international Domestic individual equities (5) (4) Total Assets at Fair Value December 31, 2019 Fair Value Asset Classes (1) Level 1 1,831 101,320 3,066 10,435 116,652 $ $ $ $ Level 2 — — — — — $ $ Level 3 — — — — — $ $ Total 1,831 101,320 3,066 10,435 116,652 (1) (2) Refer to Note 1 Summary of Significant Accounting Policies, Fair Value Measurements for a description of levels within the fair value hierarchy. This asset class includes FDIC insured money market instruments. This asset class includes a variety of fixed income mutual funds which primarily invest in investment grade rated securities. Investment managers have discretion to invest in fixed income (3) related securities including futures, options and other derivatives. Investments may be made in currencies other than the U.S. dollar. (4) The sole investment within this asset class is Vanguard Total International Stock Index Fund Admiral Shares. This asset class includes individual domestic equities invested in an active all-cap strategy. It may also include convertible bonds. (5) NOTE 24. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN We adopted an Incentive Stock Plan in 2014 that provides for cash performance awards and for granting incentive stock options, nonstatutory stock options, restricted stock, restricted stock units and appreciation rights. A maximum of 750,000 shares of our common stock are available for awards granted under the 2014 Incentive Plan and the plan expires ten years from the date of board approval. Previously granted but forfeited shares are added to the shares available for issuance. As of December 31, 2020, 760,636 restricted shares have been granted of which 136,896 were forfeited shares for a total of 623,740 restricted shares granted under the 2014 Incentive Plan. As of December 31, 2020, no nonstatutory stock options were outstanding under the 2014 Stock Plan. Restricted Stock We periodically issue restricted stock to employees and directors pursuant to our 2014 Stock Plan. During 2020, 2019 and 2018, we granted 23,153, 11,231 and 9,264 restricted shares of common stock to outside directors under the 2014 Stock Plan. The grants are part of the compensation arrangement approved by the Compensation and Benefits Committee whereby the directors receive compensation in the form of both cash and restricted shares of common stock. These shares fully vest one year after the date of grant. During 2020, 2019 and 2018, we granted 207,550, 73,651 and 66,733 restricted shares of common stock to senior management under our Long Term Incentive Plan, or LTIP, within the 2014 Stock Plan. The restricted shares granted under the LTIP consist of both time and performance-based awards. The awards were granted in accordance with performance levels set by the Compensation and Benefits Committee. Vesting for the time-based awards is 50 percent after two years and the remaining 50 percent at the end of the third year. The performance-based awards vest at the end of the three-year period. During the vesting period, if the recipient leaves S&T before the end of the vesting period, shares will be forfeited except in the case of retirement, disability or death where accelerated vesting provisions are defined within the awards agreement. Included in the 2020 grant of 207,550 restricted shares were 83,669 shares of common stock to three Senior Executive Officers. On October 2, 2020, The 2014 Incentive Stock Plan was modified in connection with the announcement that our Chief Executive Officer will retire on March 31, 2021. Upon retirement, he will transition to an advisory service role for a three year period. According to the terms of the Letter Agreement, any unvested equity awards held at retirement will vest according to the original terms during the consulting period and subject to the terms of Letter Agreement. Original awards of 20,916 restricted shares were forfeited and new awards were granted and revalued. Compensation expense decreased $0.3 million as a result of the modification agreement. Also in 2020, 62,753 restricted shares of common stock were granted to two other Senior Executive Officers with an increase to compensation expense of $1.3 million. Pursuant to the restricted stock award agreements, these awards will vest 33 percent on October 12, 2021, 33 percent on October 12, 2022 and 34 percent on October 12, 2023. During 2020, 2019 and 2018, we recognized compensation expense of $0.7 million, $2.4 million and $1.9 million and realized a tax benefit of $0.2 million, $0.5 million and $0.4 million related to restricted stock grants. 131 Table of Contents NOTE 24. INCENTIVE AND RESTRICTED STOCK PLAN AND DIVIDEND REINVESTMENT PLAN -- continued The following table provides information about restricted stock granted under the 2014 Stock Plan for the years ended December 31: Non-vested at December 31, 2018 Granted Vested Forfeited Non-vested at December 31, 2019 Granted Vested Forfeited Non-vested at December 31, 2020 Restricted Stock 206,395 84,882 76,014 33,228 182,035 230,703 77,317 58,741 276,680 $ Weighted Average Grant Date Fair Value 30.70 38.67 30.75 32.50 34.06 23.43 37.39 32.77 24.54 $ $ As of December 31, 2020, there was $4.2 million of total unrecognized compensation cost related to restricted stock that will be recognized as compensation expense over a weighted average period of 2.16 years. Dividend Reinvestment Plan We also sponsor a Dividend Reinvestment and Stock Purchase Plan, or Dividend Plan, where shareholders may purchase shares of S&T common stock at the average fair value with reinvested dividends and voluntary cash contributions. The plan administrator and transfer agent may purchase shares directly from us from shares held in treasury or purchase shares in the open market to fulfill the Dividend Plan’s needs. 132 NOTE 25. PARENT COMPANY CONDENSED FINANCIAL INFORMATION The following condensed financial statements summarize the financial position of S&T Bancorp, Inc. as of December 31, 2020 and 2019 and the results of its operations and cash flows for each of the three years ended December 31, 2020, 2019 and 2018. BALANCE SHEETS (dollars in thousands) ASSETS Cash Investments in: Bank subsidiary Non-bank subsidiaries Other assets Total Assets LIABILITIES Long-term debt Other liabilities Total Liabilities Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity STATEMENTS OF NET INCOME (dollars in thousands) Dividends from subsidiaries Investment income Total Income Interest expense on long-term debt Other expenses Total Expense Income before income tax and undistributed net income of subsidiaries Income tax benefit Income before undistributed net income of subsidiaries Equity in undistributed net income (distribution in excess of net income) of: Bank subsidiary Non-bank subsidiaries Net Income 133 December 31, 2020 2019 6,585 $ 7,509 1,168,831 10,493 8,614 1,194,523 39,317 495 39,812 1,154,711 1,194,523 $ $ $ 1,198,964 16,393 9,741 1,232,607 39,277 1,332 40,609 1,191,998 1,232,607 $ $ $ $ Years ended December 31, 2020 59,315 — 59,315 1,696 4,464 6,160 53,155 (1,315) 54,470 (27,529) (5,901) 21,040 $ $ $ $ 2019 59,490 1 59,491 1,285 4,325 5,610 53,881 (1,189) 55,070 42,683 481 98,234 $ $ 2018 44,988 24 45,012 1,149 3,988 5,137 39,875 (1,093) 40,968 68,385 (4,019) 105,334 Table of Contents NOTE 25. PARENT COMPANY CONDENSED FINANCIAL INFORMATION -- continued STATEMENTS OF CASH FLOWS (dollars in thousands) OPERATING ACTIVITIES Net Income Equity in undistributed (earnings) losses of subsidiaries Other Net Cash Provided by Operating Activities INVESTING ACTIVITIES Net investments in subsidiaries Acquisitions Net Cash Provided by Investing Activities FINANCING ACTIVITIES Sale of treasury shares, net Purchase of treasury shares Cash dividends paid to common shareholders Payment to repurchase of warrant Net Cash Used in Financing Activities Net decrease in cash Cash at beginning of year Cash at End of Year NOTE 26. REGULATORY MATTERS Years ended December 31, 2020 21,040 33,430 1,708 56,178 — — — (594) (12,559) (43,949) — (57,102) (924) 7,509 6,585 $ $ 2019 2018 98,234 (43,164) (99) 54,971 176 (10) 166 (915) (18,222) (37,360) — (56,497) (1,360) 8,869 7,509 $ $ 105,334 (64,366) 1,695 42,663 — — — (657) (12,256) (34,539) (7,652) (55,104) (12,441) 21,310 8,869 $ $ We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our Consolidated Financial Statements. Under capital guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about risk weightings and other factors. The most recent notifications from the Federal Reserve and the FDIC categorized S&T and S&T Bank as well capitalized under the regulatory framework for corrective action. There have been no conditions or events that we believe have changed S&T's or S&T Bank’s status during 2020 and 2019. Common equity tier 1 capital includes common stock and related surplus plus retained earnings, less goodwill and intangible assets subject to a limitation and certain deferred tax assets subject to a limitation. In addition, we made a one-time permanent election to exclude accumulated other comprehensive income from capital. For regulatory purposes, trust preferred securities totaling $29.0 million, issued by an unconsolidated trust subsidiary of S&T underlying junior subordinated debt, are included in Tier 1 capital for S&T. Total capital consists of Tier 1 capital plus junior subordinated debt and the ACL subject to limitation. We currently have $32.8 million in junior subordinated debt which is included in Tier 2 capital for S&T in accordance with current regulatory reporting requirements. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of December 31, 2020 and 2019, we met all capital adequacy requirements to which we are subject. 134 Table of Contents NOTE 26. REGULATORY MATTERS -- continued The following table summarizes risk-based capital amounts and ratios for S&T and S&T Bank: (dollars in thousands) As of December 31, 2020 Leverage Ratio S&T S&T Bank Common Equity Tier 1 (to Risk-Weighted Assets) S&T S&T Bank Tier 1 Capital (to Risk-Weighted Assets) S&T S&T Bank Total Capital (to Risk-Weighted Assets) S&T S&T Bank As of December 31, 2019 Leverage Ratio S&T S&T Bank Common Equity Tier 1 (to Risk-Weighted Assets) S&T S&T Bank Tier 1 Capital (to Risk-Weighted Assets) S&T S&T Bank Total Capital (to Risk-Weighted Assets) S&T S&T Bank Actual Minimum Regulatory Capital Requirements To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio $ $ 825,515 810,636 796,515 810,636 825,515 810,636 944,686 922,007 854,146 832,113 825,146 832,113 854,146 832,113 954,094 922,310 350,311 349,739 316,338 315,792 421,784 421,056 562,379 561,408 331,925 331,355 324,745 324,048 432,994 432,064 577,325 576,085 9.43 % 9.27 % $ 11.33 % 11.55 % 11.74 % 11.55 % 13.44 % 13.14 % 10.29 % 10.04 % $ 11.43 % 11.56 % 11.84 % 11.56 % 13.22 % 12.81 % 135 $ $ 4.00 % 4.00 % 4.50 % 4.50 % 6.00 % 6.00 % 8.00 % 8.00 % 4.00 % 4.00 % 4.50 % 4.50 % 6.00 % 6.00 % 8.00 % 8.00 % 437,889 437,174 456,933 456,144 562,379 561,408 702,974 701,760 414,907 414,194 469,077 468,069 577,325 576,085 721,656 720,106 5.00 % 5.00 % 6.50 % 6.50 % 8.00 % 8.00 % 10.00 % 10.00 % 5.00 % 5.00 % 6.50 % 6.50 % 8.00 % 8.00 % 10.00 % 10.00 % NOTE 27. SELECTED FINANCIAL DATA The following table presents selected financial data for the most recent eight quarters. (dollars in thousands, except per share data) (unaudited) SUMMARY OF OPERATIONS Interest income Interest expense Provision for credit losses Net Interest Income After Provision For Credit Losses Security gains (losses), net Noninterest income Noninterest expense Income Before Taxes Provision for income taxes Net Income Per Share Data Common earnings per share—diluted Dividends declared per common share Common book value 2020 2019 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth (1) Quarter Third Quarter Second Quarter First Quarter $ $ $ 75,548 5,620 7,130 62,798 — 15,609 48,529 29,878 5,702 24,176 0.62 0.28 29.38 $ $ $ 76,848 7,572 17,485 51,791 — 16,483 48,246 20,028 3,323 16,705 0.43 0.28 29.10 $ $ $ 80,479 10,331 86,759 (16,611) 142 15,082 43,478 (44,865) (11,793) (33,072) (0.85) 0.28 28.93 $ $ $ 87,589 17,553 20,050 49,986 — 12,403 46,391 15,998 2,767 13,231 0.34 0.28 30.06 $ $ $ $ $ $ 82,457 18,045 2,105 62,307 (26) 15,257 50,178 27,360 5,091 22,269 0.62 0.28 30.13 79,813 18,617 4,913 56,283 — 13,063 37,667 31,679 4,743 26,936 0.79 0.27 28.69 $ $ $ $ $ $ 79,624 18,797 2,205 58,622 — 12,901 40,352 31,171 5,070 26,101 0.76 0.27 28.11 78,590 18,234 5,649 54,707 — 11,363 38,919 27,151 4,222 22,929 0.66 0.27 27.47 (1) The DNB Merger is included in our Consolidated Financial Statements beginning on December 1, 2019. NOTE 28. SALE OF A MAJORITY INTEREST OF INSURANCE BUSINESS On November 9, 2017, we entered into an asset purchase agreement to sell a 70 percent ownership interest in the assets of our subsidiary, S&T Evergreen Insurance, LLC. The partial sale was accounted for as the sale of a business. At the date of the sale, January 1, 2018, we ceased to have a controlling financial interest, deconsolidated the subsidiary and recognized a gain of $1.9 million. We transferred our remaining 30 percent share of net assets from S&T Evergreen Insurance, LLC to a new entity for a 30 percent partnership interest in a new insurance entity. We use the equity method of accounting to recognize changes in the value of our investment in the new insurance entity for our proportional share of income and losses of the new insurance entity. 136 NOTE 29. SHARE REPURCHASE PLAN On March 19, 2018, our Board of Directors authorized a $50 million share repurchase plan. This repurchase authorization, which was effective through August 31, 2019, permitted us to repurchase from time to time up to $50 million in aggregate value of shares of our common stock through a combination of open market and privately negotiated repurchases. As of December 31, 2018, we repurchased 321,731 common shares at a total cost of $12.3 million, or an average of $38.10 per share. In 2019, we repurchased 470,708 common shares at a total cost of $18.2 million, or an average of $38.71 per share. Under the March 19, 2018 plan, we repurchased 792,439 common shares at a total cost of $30.5 million, or an average of $38.46 per share. On September 16, 2019, our Board of Directors authorized a new $50 million share repurchase plan. This repurchase authorization, which is effective through March 31, 2021, permits S&T to repurchase from time to time up to $50 million in aggregate value of shares of S&T's common stock through a combination of open market and privately negotiated repurchases. No common shares were repurchased under the new repurchase plan as of December 31, 2019. As of December 31, 2020, we repurchased 411,430 common shares at a total cost of $12.6 million, or an average of $30.52 per share under the September 16, 2019 plan. Repurchase activity was suspended in March of 2020 due to the impact of the COVID-19 pandemic. The specific timing, price and quantity of repurchases will be at our discretion and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and S&T's financial performance. The repurchase plan does not obligate us to repurchase any particular number of shares. 137 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of S&T Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of S&T Bancorp, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of net income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes, collectively referred to as the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Adoption of New Accounting Standard As discussed in Notes 1 and 9 to the consolidated financial statements, the Company changed its method of accounting for credit losses in 2020. As explained below, auditing the Company’s allowance for credit losses was a critical audit matter. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 138  Allowance for Credit Losses (“ACL”) Description of the Matter How We Addressed the Matter in Our Audit On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, which resulted in an increase to the allowance for credit losses (ACL) from retained earnings of $22.6 million. At December 31, 2020, the Company’s gross portfolio of loans was $7.2 billion with an associated ACL of $117.6 million. As discussed in Note 1 to the consolidated financial statements, the ACL 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. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and an individual assessment of loans that do not share risk characteristics with other loans to determine if a specific reserve or a charge-off is appropriate. The ACL for homogeneous loans is calculated using a life-time loss rate methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. Management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. The reasonable and supportable forecast adjustment is based on forecasted unemployment. The qualitative adjustments for current conditions are based upon value of underlying collateral for collateral dependent loans and the existence of and changes in concentrations for the commercial loan portfolios. Auditing the ACL involves a high degree of subjectivity due to the qualitative adjustments. Management’s identification and measurement of the qualitative adjustments is highly judgmental and could have a significant effect on the ACL. We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the ACL process, which include, among others, management’s review and approval controls designed to assess the need for and level of qualitative adjustments and the reliability of the data utilized to support management’s assessment. To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed the basis for the adjustments and whether all relevant risks were reflected in the ACL. Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy and relevance of the underlying internal and external data utilized in management’s estimate and considered the existence of additional or contrary information. We evaluated the overall ACL, inclusive of the qualitative adjustments, and whether the amount appropriately reflects a reasonable estimate of lifetime losses by comparing the overall ACL to historical losses and ACL reserves established by peer banking institutions. /s/ Ernst & Young LLP We have served as the Company’s auditors since 2018. Pittsburgh, Pennsylvania February 26, 2021 139 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of S&T Bancorp, Inc., Opinion on Internal Control Over Financial Reporting We have audited S&T Bancorp, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, S&T Bancorp, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of net income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 26, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania February 26, 2021 140 141 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 142 Item 9A. CONTROLS AND PROCEDURES a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of S&T’s Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO (its principal executive officer and principal financial officer), management has evaluated the effectiveness of the design and operation of S&T’s disclosure controls and procedures as of December 31, 2020. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to S&T’s management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on and as of the date of such evaluation, our CEO and CFO concluded that the design and operation of our disclosure controls and procedures were effective in all material respects, as of the end of the period covered by this Report. b) Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management assessed S&T’s system of internal control over financial reporting as of December 31, 2020, in relation to criteria for effective internal control over financial reporting as described in “Internal Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concludes that, as of December 31, 2020, S&T’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control Integrated Framework (2013).” Management assessed the effectiveness of S&T's internal control over financial reporting as of December 31, 2020, in relation to criteria for effective internal control over financial reporting as described in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management concluded that, as of December 31, 2020, S&T's internal controls over financial reporting were effective. Ernst & Young LLP, independent registered public accounting firm, has issued a report on the effectiveness of S&T’s internal control over financial reporting as of December 31, 2020, which is included herein. c) Changes in Internal Control Over Financial Reporting No changes were made to S&T’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, S&T’s internal control over financial reporting. 143 Item 9B. OTHER INFORMATION Not applicable 144 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Part III, Item 10 of Form 10-K is incorporated herein from the sections entitled “Beneficial Ownership of S&T Common Stock by Directors and Officers -- Delinquent Section 16(a) Reports”, “Proposal 1 -- Election of Directors,” “Executive Officers of the Registrant,” “Corporate Governance --Audit Committee,” "Corporate Governance - Director Qualifications and Nominations: Board Diversity" and “Corporate Governance --Code of Conduct and Ethics” in our proxy statement relating to our May 17, 2021 annual meeting of shareholders. Item 11. EXECUTIVE COMPENSATION The information required by Part III, Item 11 of Form 10-K is incorporated herein from the sections entitled “Compensation Discussion and Analysis,” “Executive Compensation,” “Director Compensation,” “Corporate Governance -- Compensation Committee Interlocks and Insider Participation,” “Corporate Governance - The S&T Board’s Role in Risk Oversight” and “Compensation and Benefits Committee Report” in our proxy statement relating to our May 17, 2021 annual meeting of shareholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Except as set forth below, the information required by Part III, Item 12 of Form 10-K is incorporated herein from the sections entitled “Beneficial Owners of S&T Common Stock” and “Beneficial Ownership of S&T Common Stock by Directors and Officers” in our proxy statement relating to our May 17, 2021 annual meeting of shareholders. Equity Compensation Plan Information The following table provides information as of December 31, 2020 related to the equity compensation plans in effect at that time. Plan category Equity compensation plan approved by shareholders Equity compensation plans not approved by shareholders Total (1) (a) (b) (c) Number of securities to be issued upon exercise of outstanding options, warrants and rights 101,306 — 101,306 (2) Weighted average exercise price of outstanding options, warrants and rights $ — — Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a)) 126,260 — 126,260 (1) (2) Awards granted under the 2014 Incentive Stock Plan. Represents performance shares that can be earned under the 2014 Stock Plan with no associated exercise price. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Part III, Item 13 of Form 10-K is incorporated herein from the sections entitled “Related Person Transactions” and “Corporate Governance -- Director Independence” in our proxy statement relating to our May 17, 2021 annual meeting of shareholders. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Part III, Item 14 of Form 10-K is incorporated herein from the section entitled “Proposal 2: Ratification of the Selection of Independent Registered Public Accounting Firm for Fiscal Year 2021” in our proxy statement relating to our May 17, 2021 annual meeting of shareholders. 145 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Report. PART IV Consolidated Financial Statements: The following Consolidated Financial Statements are included in Part II, Item 8 of this Report. No financial statement schedules are being filed because the required information is inapplicable or is presented in the Consolidated Financial Statements or related notes. Consolidated Balance Sheets Consolidated Statements of Net Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements 146 70 71 72 73 74 76 140 138 (b) Exhibits 2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 3.7 — 4.1 10.1 10.2 10.3 10.4 10.5 Agreement and Plan of Merger, dated as of October 29, 2014, between S&T Bancorp, Inc. and Integrity Bancshares, Inc. Filed as Exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on October 30, 2014, and incorporated herein by reference. Agreement and Plan of Merger, dated June 5, 2019, by and between DNB Financial Corporation and S&T Bancorp, Inc. Filed as Exhibit 2.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on June 5, 2019, and incorporated herein by reference. Articles of Incorporation of S&T Bancorp, Inc. Filed as Exhibit B to Form S-4 Registration Statement (No. 2-83565) of S&T Bancorp, Inc., dated May 5, 1983, and incorporated herein by reference. Amendment to Articles of Incorporation of S&T Bancorp, Inc. Filed as Exhibit 3.2 to Form S-4 Registration Statement (No. 33- 02600) of S&T Bancorp, Inc. dated January 15, 1986, and incorporated herein by reference. Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective May 8, 1989 Filed as Exhibit 3.3 to S&T Bancorp, Inc. Annual Report on Form 10-K for year ended December 31, 1998, and incorporated herein by reference. Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective July 21, 1995. Filed as Exhibit 3.4 to S&T Bancorp, Inc. Annual Report on Form 10-K for year ended December 31, 1998, and incorporated herein by reference. Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective June 18, 1998. Filed as Exhibit 3.5 to S&T Bancorp, Inc. Annual Report on Form 10-K for year ended December 31, 1998, and incorporated herein by reference. Amendment to Articles of Incorporation of S&T Bancorp, Inc. effective April 21, 2008. Filed as Exhibit 3.1 to S&T Bancorp, Inc. Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2008, and incorporated herein by reference. Certificate of Designations for the Series A Preferred Stock. Filed as Exhibit 3.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on January 15, 2009, and incorporated herein by reference. Amended and Restated By-laws of S&T Bancorp, Inc. Filed as Exhibit 3.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on December 23, 2020, and incorporated herein by reference. The Company has certain long-term debt but has not filed the instruments evidencing such debt as Exhibit 4 as none of such instruments authorize the issuance of debt exceeding 10 percent of the Companies total consolidated assets. The Company agrees to furnish a copy of each such agreement to the Securities and Exchange Commission upon request. Description of Securities. Filed as Exhibit 4.1 to S&T Bancorp, Inc. Annual Report on Form 10-K for year ended December 31, 2019, and incorporated herein by reference S&T Bancorp, Inc. 2003 Incentive Stock Plan. Filed as Exhibit 4.2 to Form S-8 Registration Statement (No. 333-111557) of S&T Bancorp, Inc. dated December 24, 2003, and incorporated herein by reference.* S&T Bancorp, Inc. Thrift Plan for Employees of S&T Bank, as amended and restated. Filed as Exhibit 4.2 to Form S-8 Registration Statement (No. 333-156541) of S&T Bancorp, Inc. dated December 31, 2008, and incorporated herein by reference.* Dividend Reinvestment and Stock Purchase Plan of S&T Bancorp, Inc. Filed as Exhibit 4.2 to Form S-3D Registration Statement (No. 333-156555) of S&T Bancorp, Inc. dated January 2, 2009 (included within the prospectus contained therein), and incorporated herein by reference. Severance Agreement, by and between Todd D. Brice and S&T Bancorp, Inc. dated April 7, 2015. Filed as Exhibit 10.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on August 10, 2015, and incorporated herein by reference.* Letter Agreement, dated as of October 2, 2020, by and between S&T Bancorp, Inc. and Todd D. Brice. Filed as Exhibit 10.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on October 2, 2020, and incorporated herein by reference.* 147 (b) Exhibits — — — — 10.10 10.11 10.12 21 23.1 31.1 31.2 32 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE Confidentiality, Trade Secrets, Non-Solicitation and Severance Agreement, dated October 14, 2020, by and between David G. Antolik and S&T Bancorp, Inc. Filed as Exhibit 10.3 to S&T Bancorp, Inc. Current Report on Form 8-K filed on October 16, 2020, and incorporated herein by reference.* Restricted Stock Award Agreement David G. Antolik, dated October 12, 2020. Filed as Exhibit 10.1 to S&T Bancorp, Inc. Current Report on Form 8-K filed on October 16, 2020, and incorporated herein by reference.* Confidentiality, Trade Secrets, Non-Solicitation and Severance Agreement, dated October 14, 2020, by and between Mark Kochvar and S&T Bancorp, Inc. Filed as Exhibit 10.4 to S&T Bancorp, Inc. Current Report on Form 8-K filed on October 16, 2020. Restricted Stock Award Agreement Mark Kochvar, dated October 12, 2020. Filed as Exhibit 10.2 to S&T Bancorp, Inc. Current Report on Form 8-K filed on October 16, 2020, and incorporated herein by reference.* S&T Bancorp, Inc. 2014 Incentive Plan. Filed as Exhibit 10.9 to S&T Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2013, and incorporated herein by reference. * Severance and General Release Agreement, dated August 4, 2020, by and between David P. Ruddock and S&T Bancorp, Inc., S&T Bank and any of their subsidiaries or affiliated business. Filed as Exhibit 10.1 to S&T Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, and incorporated herein by reference * Confidentiality, Trade Secrets, Non-Solicitation and Severance Agreement, dated November 2, 2020, by and between Ernest J. Draganza and S&T Bancorp, Inc., S&T Bank and their subsidiaries and affiliated companies. Filed as Exhibit 10.2 to S&T Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, and incorporated herein by reference.* Subsidiaries of the Registrant. Consent of Ernst & Young LLP, S&T Bancorp, Inc.'s Current Independent Registered Public Accounting Firm. Rule 13a-14(a) Certification of the Principal Executive Officer. Rule 13a-14(a) Certification of the Principal Financial Officer. Rule 13a-14(b) Certification of the Chief Executive Officer and Principal Financial Officer. XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document XBRL Taxonomy Extension Schema XBRL Taxonomy Extension Calculation Linkbase XBRL Taxonomy Extension Definition Linkbase XBRL Taxonomy Extension Label Linkbase XBRL Taxonomy Extension Presentation Linkbase 104 Cover Page Interactive Data File ((formatted as Inline XBRL and contained in Exhibits 101)) *Management Contract or Compensatory Plan or Arrangement 148 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. S&T BANCORP, INC. (Registrant) /s/ Todd D. Brice Todd D. Brice Chief Executive Officer (Principal Executive Officer) /s/ Mark Kochvar Mark Kochvar Senior Executive Vice President, Chief Financial Officer (Principal Financial Officer) 2/26/2021 Date 2/26/2021 Date Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Todd D. Brice Todd D. Brice /s/ Mark Kochvar Mark Kochvar /s/ Melanie Lazzari Melanie Lazzari /s/ David G. Antolik David G. Antolik /s/ Christine J. Toretti Christine J. Toretti Lewis W. Adkins Jr. /s/ Peter R. Barsz Peter R. Barsz Chief Executive Officer and Director (Principal Executive Officer) 2/26/2021 Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) Executive Vice President, Controller President and Director Chair of the Board and Director Director Director 149 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 SIGNATURE /s/ Christina A. Cassotis Christina A. Cassotis /s/ Michael J. Donnelly Michael J. Donnelly /s/ James T. Gibson James T. Gibson /s/ Jeffrey D. Grube Jeffrey D. Grube /s/ William J. Hieb William J. Hieb Jerry D. Hostetter /s/ Robert E. Kane Robert E. Kane James C. Miller /s/ Frank J. Palermo, Jr. Frank J. Palermo, Jr. /s/ Steven J. Weingarten Steven J. Weingarten Director Director Director Director Director Director Director Director Director Director 150 TITLE DATE 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 2/26/2021 SUBSIDIARIES OF THE REGISTRANT S&T Bancorp, Inc., a Pennsylvania corporation, is a financial holding company. The table below sets forth all of our subsidiaries, except certain inactive subsidiaries, as to state or jurisdiction of organization. Exhibit 21 Subsidiary S&T Bank 9th Street Holdings, Inc. S&T Bancholdings, Inc. S&T Insurance Group, LLC S&T Professional Resources Group, LLC S&T-Evergreen Insurance, LLC (sold 1/1/2018) S&T Settlement Services, LLC Stewart Capital Advisors, LLC STBA Capital Trust I Commonwealth Trust Credit Life Insurance Company DNB Capital Trust I DNB Capital Trust II DNB Financial Services, Inc. Downco, Inc. DN Acquisition Company, Inc. State or Jurisdiction of Organization Pennsylvania Delaware Delaware Pennsylvania Pennsylvania Pennsylvania Pennsylvania Pennsylvania Delaware Arizona Delaware Delaware Pennsylvania Pennsylvania Pennsylvania Exhibit 23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements: 1) Registration Statement (Form S-3 No. 333-226488) of S&T Bancorp, Inc. pertaining to the automatic shelf registration filed August 1, 2018, 2) Registration Statement (Form S-3 No. 333-156555) of S&T Bancorp, Inc. pertaining to the Dividend Reinvestment and Stock Purchase Plan, 3) Registration Statement (Form S-8 No. 333-194083) of S&T Bancorp, Inc. pertaining to the 2014 Incentive Plan, and 4) Registration Statement (Form S-8 No. 333-156541) of S&T Bancorp, Inc. pertaining to the Thrift Plan for Employees of S&T Bank; of our reports dated February 26, 2021 with respect to the consolidated financial statements of S&T Bancorp, Inc. and the effectiveness of internal control over financial reporting of S&T Bancorp, Inc. included in this Annual Report (Form 10-K) of S&T Bancorp, Inc. for the year ended December 31, 2020. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania February 26, 2021 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Todd D. Brice, certify that: 1. I have reviewed this Annual Report on Form 10-K of S&T Bancorp, Inc.; Exhibit 31.1 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 26, 2021 /s/ Todd D. Brice Todd D. Brice, Chief Executive Officer Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark Kochvar, certify that: Exhibit 31.2 1. I have reviewed this Annual Report on Form 10-K of S&T Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 26, 2021 /s/ Mark Kochvar Mark Kochvar, Senior Executive Vice President, Chief Financial Officer Exhibit 32 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER SARBANES-OXLEY ACT SECTION 906 Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the S&T Bancorp, Inc. (the “Company”) Annual Report on Form 10-K for the period ending December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd D. Brice, President and Chief Executive Officer of the Company, and I, Mark Kochvar, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and period covered by the report. This certificate is being made for the exclusive purpose of compliance by the Chief Executive Officer and Chief Financial Officer of the Company with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be disclosed, distributed or used by any person or for any reason other than as specifically required by law. Date: February 26, 2021 /s/ Todd D. Brice Todd D. Brice, Chief Executive Officer /s/ Mark Kochvar Mark Kochvar, Senior Executive Vice President, Chief Financial Officer 

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