# S&T BANCORP INC (STBA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from S&T BANCORP INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/719220/000071922022000016/stba-20211231.htm
Accession: 0000719220-22-000016
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/STBA/
All MD&A years: /company/STBA/mda/
Next year: /company/STBA/mda/fy2022/ (FY 2022)

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section reviews our financial condition for each of the past two years and results of operations for each of the past three years. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. Some tables may include additional time periods to illustrate trends within our Consolidated Financial Statements. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods.

Important Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, financial position, and other matters regarding or affecting S&T and its future business and operations. Forward looking statements are typically identified by words or phrases such as “will likely result”, “expect”, “anticipate”, “estimate”, “forecast”, “project”, “intend”, “believe”, “assume”, “strategy”, “trend”, “plan”, “outlook”, “outcome”, “continue”, “remain”, “potential”, “opportunity”, “comfortable”, “current”, “position”, “maintain”, “sustain”, “seek”, “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to: credit losses and the credit risk of our commercial and consumer loan products; changes in the level of charge-offs and changes in estimates of the adequacy of the allowance for credit losses, or ACL; cyber security concerns; rapid technological developments and changes; operational risks or risk management failures by us or critical third parties, including fraud risk; our ability to manage our reputational risks; sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve; a change in spreads on interest-earning assets and interest-bearing liabilities; the transition from LIBOR as a reference rate; regulatory supervision and oversight, including changes in regulatory capital requirements and our ability to address those requirements; unanticipated changes in our liquidity position; changes in accounting policies, practices, or guidance; legislation affecting the financial services industry as a whole, and S&T, in particular; climate change and related legislative and regulatory initiatives; the outcome of pending and future litigation and governmental proceedings; increasing price and product/service competition; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; managing our internal growth and acquisitions; the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; containing costs and expenses; reliance on significant customer relationships; an interruption or cessation of an important service by a third-party provider; our ability to attract and retain talented executives and employees, particularly in light of the strong competition in the marketplace; our ability to successfully manage our CEO transition; general economic or business conditions, including the strength of regional economic conditions in our market area; macroeconomic conditions including inflation and economic uncertainty; the duration and severity of the coronavirus, or COVID-19 pandemic, both in our principal area of operations and nationally, including the ultimate impact of the pandemic on the economy generally and on our operations; our participation in the Paycheck Protection Program; deterioration of the housing market and reduced demand for mortgages; deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge to net income; the stability of our core deposit base and access to contingency funding; re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses. Many of these factors, as well as other factors, are described elsewhere in this report, including Part I, Item 1A, Risk Factors and any of our subsequent filings with the SEC. Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made. 

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Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. These estimates, assumptions and judgments are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Certain policies are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported.

Our most significant accounting policies are presented in Note 1 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Report. These policies, along with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the Consolidated Financial Statements and how those values are determined.

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

GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We currently view the determination of the ACL and goodwill and other intangible assets to be critical accounting policies. Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for critical accounting policies and estimates for the prior year. We did not significantly change the manner in which we applied our critical accounting policies or developed related assumptions or estimates during 2021. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee.

Allowance for Credit Losses

In January 2020, we adopted ASC 326, which replaced the former incurred loss methodology with an expected credit loss methodology that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset. The allowance for credit losses, or ACL, is a valuation reserve established and maintained by charges against operating income. It is an estimate of expected credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions and forecasts of future economic conditions.

Management’s evaluation process used to determine the appropriateness of the ACL is complex and requires the use of estimates, assumptions and judgments which are inherently subject to high uncertainty. The evaluation process combines several factors: historical loan loss experience, managements ongoing review of lending policies and practices, experience and depth of staff, quality of the loan grading system, the fair value of underlying collateral, concentration of loans to specific borrowers or industries, existing economic conditions and forecasts, segment specific risks and other quantitative and qualitative factors which could affect future credit losses. Our reasonable and supportable forecast is based primarily on the national unemployment forecast produced by the Federal Reserve and is for a period of two years. For periods beyond our two-year forecast, we revert to historical loss rates utilizing a straight-line method over a one-year reversion period. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and the appropriateness of the ACL could change significantly. It is challenging to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

In conjunction with our capital stress testing process, we consider different economic scenarios that impact the ACL. Among other balance sheet and income statement changes, our severely adverse scenario would have resulted in an increase to the ACL of approximately 80 percent. This stressed scenario includes both the quantitative and qualitative components of the model. This severely adverse scenario shows how sensitive the ACL can be to key qualitative and quantitative assumptions underlying the overall ACL calculation. To the extent actual losses are higher than management estimates, additional provision for credit losses could be required and could adversely affect our earnings or financial position in future periods.

Goodwill and Other Intangible Assets

As a result of acquisitions, we have recorded goodwill and identifiable intangible assets in our Consolidated Balance Sheets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired.

The acquisition method of accounting requires that assets acquired and liabilities assumed in business combinations are recorded at their fair values. This often involves estimates based on third party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques which are inherently subjective. Business combinations also typically result in goodwill which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the acquired goodwill relates.

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

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circumstances indicate that it may be impaired. We test for impairment by comparing the fair value of our Community Banking reporting unit with its carrying amount. An impairment charge would be recognized if the the carrying amount exceeds the reporting unit's fair value. Determining the fair value of a reporting unit is judgmental and involves the use of significant estimates and assumptions. The fair value of the reporting unit is determined by using both a discounted cash flow model and market based models. The discounted cash flow model has many assumptions including future earnings projections, a long-term growth rate and discount rate. The market based method calculates the fair value based on observed price multiples for similar companies. The fair values of each method are then weighted based on the relevance and reliability in the current economic environment.

We last completed a quantitative goodwill impairment test as of November 30, 2020 and concluded that goodwill was not impaired. A discount rate of 11.50 percent was used for the income approach. If the discount rate was increased 2 percent to 13.50 percent, our fair value would have still exceeded carrying value resulting in no goodwill impairment. Based upon our qualitative assessment performed for our annual impairment analysis as of October 1, 2021, we concluded that goodwill is not impaired.

The financial services industry and securities markets can be adversely affected by declining values. If economic conditions result in a prolonged period of economic weakness in the future, our business may be adversely affected. In the event that we determine that our goodwill is impaired, recognition of an impairment charge could have a significant adverse impact on our financial position or results of operations in the period in which the impairment occurs.

Recent Accounting Pronouncements and Developments

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

Explanation of Use of Non-GAAP Financial Measures

In addition to traditional measures presented in accordance with GAAP, our management uses, and this Report contains or references, certain non-GAAP financial measures identified below. We believe these non-GAAP financial measures provide information useful to investors in understanding our underlying operational performance and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. See discussion of net interest income on an FTE basis (non-GAAP) and the efficiency ratio (non-GAAP) and related reconciliations to GAAP discussed below.

Executive Overview

We are a bank holding company that is headquartered in Indiana, Pennsylvania with assets of $9.5 billion at December 31, 2021. 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.

On August 23, 2021, Christopher McComish joined S&T as our new chief executive officer. He brings over 34 years of proven banking leadership with a track record of growth and transformation of commercial, consumer and wealth businesses. Additionally, we have elevated both proven internal leaders and attracted external talent from larger banking institutions to position us for future growth. Our priorities for 2022 and beyond include pursuing high impact growth initiatives, ensuring rigorous credit risk and enterprise governance practices, advancing strategic infrastructure and platform investments, investing in organization talent and performance and promoting strategic clarity and effective communications. Organic loan growth continues to be our top priority within our current footprint and through market expansion. Our growth strategy includes a collaborative model that combines expertise from all areas of our business and focuses on satisfying each customer’s individual financial objectives.We also actively evaluate acquisition opportunities that align with our strategic objectives as another source of growth.

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Results of Operations

Year Ended December 31, 2021

COVID-19 Pandemic Update

S&T continues to monitor the impact of the COVID-19 pandemic and has taken steps to mitigate the potential risks and impact on S&T and to promote the health and safety of our employees, and the customers and communities that we serve. We have taken preventive health measures for our employees through rigorous sanitation, social distancing, wearing masks, remote work where feasible and providing access to financial wellness programs. We have taken extensive safety measures for our customers in our branches and are encouraging our customers to use online and mobile banking solutions. We have also extended our solution center hours to allow for customer consultation without entering a branch. Our Business Continuity teams were activated and have guided our response efforts.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or CARES Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program, or PPP, a $349 billion program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. The PPP and Health Care Enhancement Act, or PPP/HCEA, was signed into law on April 24, 2020. The PPP/HCEA authorized an additional $310 billion of funding under the CARES Act for PPP loans among other provisions. On July 4, 2020, legislation was passed to extend the application period for the PPP through August 8, 2020.These loans are intended to cover eight weeks of payroll and other permitted expenses to help those businesses remain viable. The PPP ended on May 31, 2021.

We originated $771.5 million of PPP loans during 2020 and 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted expenses in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00 percent and a term of two years, or five years for loans approved by the SBA, on or after June 5, 2020. Payments are deferred for at least six months of the loan. The loans are 100 percent guaranteed by the SBA.

The extent to which the COVID-19 pandemic may adversely impact our business depends on future developments, which remain highly uncertain and unpredictable. The pandemic has had, and we expect that it will continue to have, negative impacts on S&T’s commercial and consumer loan customers and the economy as a whole. The severity and length of the pandemic’s impact on S&T and the U.S. and global economies continue to be unknown. Our financial performance continues to be negatively impacted in many ways due to the pandemic. We are closely monitoring our asset quality with a focus on the loan portfolios that have been significantly impacted by the pandemic, including hotel, healthcare and C&I portfolios. We have increased our ACL to be responsive to this additional risk within our loan portfolio. We did experience improvement in our asset quality during 2021, but remain cautious given the current environment. The hotel portfolio improved in the second half of 2021 with $34.0 million of loans being returned to performing status due to improved operating performance. Our balance sheet is asset sensitive resulting in our net interest income and net interest margin, or NIM, being negatively impacted in this low interest rate environment. Loan demand was challenging in the first half of 2021, but we saw growth trends improving late in the second quarter and for the third and fourth quarter of 2021. Net interest income was favorably impacted by PPP loans which contributed to net interest income $17.3 million for 2021 and $11.4 million for 2020.

In order to assist our customers through this difficult period, we have provided the following assistance, which may have an adverse impact on our results in the short term, but which we believe will provide better outcomes in the long term for our customers and for S&T.

•We provided needs-based payment deferrals and modifications to interest only periods to commercial loans during 2020 and 2021 totaling $995.7 million. Only $28.8 million remain on deferral at December 31, 2021.

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•We provided loan payment deferrals, with no negative credit bureau reporting, to mortgage and consumer loans during 2020 and 2021 totaling $81.6 million. No loans remain on deferral at December 31, 2021.

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

Earnings Summary

Net income increased $89.3 million to $110.3 million, or $2.81 per diluted share, in 2021 compared to $21.0 million, or $0.53 per diluted share in 2020. This net increase was primarily due to a lower provision for credit losses related to improving economic conditions, as well the offsetting impact of the 2020 customer fraud that reduced net income by $46.3 million, or $1.19 per diluted share.We experienced a pre-tax loss of $58.7 million related to a customer fraud resulting from a check kiting scheme during 2020. The fraud was perpetrated by a single business customer and the customer has plead guilty in a criminal investigation. We continue to pursue all available sources of recovery to mitigate the loss.

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

Net interest income decreased $3.3 million to $276.1 million compared to 2020. The decrease in interest income was primarily due to lower average loan balances and the low rate interest environment compared to 2020. Average loan balances decreased $325.8 million compared to 2020. Net interest income was favorably impacted by PPP loans which contributed $17.3 million compared to $11.4 million in 2020. Average interest-bearing deposits decreased $126.2 million compared to 2020. The net interest margin, or NIM, on an FTE basis (non-GAAP) decreased 16 basis points compared to 2020. The decrease is primarily due to higher average cash balances and the low interest rate environment. PPP loans positively impacted the NIM on an FTE basis (non-GAAP) by 8 basis points compared to the negative impact of 3 basis points in 2020. NIM is reconciled to net interest income adjusted to an FTE basis (non-GAAP) below in the "Net Interest Income" section of this MD&A.

The provision for credit losses was $16.2 million for 2021 compared to $131.4 million in 2020. Excluding a customer fraud loss of $58.7 million, the provision for credit losses was $72.7 million for 2020. The significant decrease in the provision for credit losses during 2021 was mainly due to the customer fraud in 2020 and an improved outlook for the economy and our loan portfolio. Net loan charge-offs were $34.5 million, or 0.49 percent of average loans, in 2021 compared to $103.4 million, or 1.40 percent of average loans, during 2020. Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.61 percent of average loans in 2020.

Noninterest income increased $4.9 million to $64.6 million compared to $59.7 million in 2020. Wealth management income increased $2.9 million due to customer growth and improved market conditions. Debit and credit card fees increased $2.9 million and service charges on deposit accounts increased $1.4 million due to increased customer activity. These were offset by lower commercial loan swap income of $3.6 million and mortgage banking income of $1.2 million.

Noninterest expense increased $2.2 million to $188.8 million compared to $186.6 million in 2020. Salaries and employee benefits increased $10.1 million primarily due to higher incentives. Data processing and information technology increased $1.2 million due to new products and services in 2021. These higher expenses were offset by decreases in other noninterest expense of $4.1 million, merger related expenses of $2.3 million and marketing of $1.4 million. The efficiency ratio (non-GAAP) for 2021 was 55.05 percent compared to 53.86 percent for 2020.

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

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[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020","","2019"],["Efficiency Ratio (non-GAAP)"],["Noninterest expense","$188,839","","","$186,644","","","$167,116"],["Less: merger related expenses","\u2014","","","(2,342)","","","(11,350)"],["Noninterest expense excluding nonrecurring items","$188,839","","","$184,302","","","$155,766"],["Net interest income per consolidated statements of net income","$276,112","","","$279,388","","","$246,791"],["Plus: taxable equivalent adjustment","2,316","","","3,202","","","3,757"],["Net interest income (FTE) (non-GAAP)","278,428","","","282,590","","","250,548"],["Noninterest income","64,611","","","59,719","","","52,558"],["Less: net (gains) losses on sale of securities","(29)","","","(142)","","","26"],["Net interest income (FTE) (non-GAAP) plus noninterest income","$343,010","","","$342,167","","","$303,132"],["Efficiency ratio (non-GAAP)","55.05","%","","53.86","%","","51.39","%"]]
[[/GREPCENT_TABLE]]

The provision for income taxes increased to $25.3 million in 2021 compared to nearly zero for 2020. The increase in our income tax provision was primarily due to a $114.6 million increase in pretax income in 2021 compared to 2020 when pretax income was impacted by significantly higher provision for credit losses. The effective tax rate increased to 18.7 percent in 2021 compared to a nominal negative annual effective tax rate in 2020. The increase in the effective tax rate was primarily due to significantly higher income before taxes in 2021 compared to 2020.

Net Interest Income

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:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(dollars in thousands)","2021","","2020","","2019"],["Total interest income","$","289,262","","","$","320,464","","","$","320,484"],["Total interest expense","13,150","","","41,076","","","73,693"],["Net interest income per Consolidated Statements of Net Income","276,112","","","279,388","","","246,791"],["Adjustment to FTE basis","2,316","","","3,202","","","3,757"],["Net Interest Income (FTE) (non-GAAP)","$","278,428","","","$","282,590","","","$","250,548"],["Net interest margin","3.19","%","","3.34","%","","3.58","%"],["Adjustment to FTE basis","0.03","","","0.04","","","0.06"],["Net Interest Margin (FTE) (non-GAAP)","3.22","%","","3.38","%","","3.64","%"]]
[[/GREPCENT_TABLE]]

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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:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["(dollars in thousands)","Average Balance","","Interest","","Rate","","Average Balance","","Interest","","Rate","","Average Balance","","Interest","","Rate"],["ASSETS"],["Interest-bearing deposits with banks","$","722,057","","","$","973","","","0.13","%","","$","179,887","","","$","515","","","0.29","%","","$","59,941","","","$","1,233","","","2.06","%"],["Securities at fair value(2)(3)","832,304","","","18,135","","","2.18","%","","764,311","","","19,011","","","2.49","%","","678,069","","","17,876","","","2.64","%"],["Loans held for sale","4,094","","","124","","","3.03","%","","5,105","","","160","","","3.13","%","","2,169","","","84","","","3.88","%"],["Commercial real estate","3,249,559","","","119,594","","","3.68","%","","3,347,234","","","140,288","","","4.19","%","","2,945,278","","","144,877","","","4.92","%"],["Commercial and industrial","1,829,563","","","75,860","","","4.15","%","","2,018,318","","","77,752","","","3.85","%","","1,575,485","","","79,429","","","5.04","%"],["Commercial construction","471,286","","","15,443","","","3.28","%","","442,088","","","16,702","","","3.78","%","","278,665","","","14,237","","","5.11","%"],["Total commercial loans","5,550,407","","","210,897","","","3.80","%","","5,807,640","","","234,742","","","4.04","%","","4,799,428","","","238,543","","","4.97","%"],["Residential mortgage","881,494","","","36,211","","","4.11","%","","964,740","","","40,998","","","4.25","%","","765,604","","","33,889","","","4.43","%"],["Home equity","543,777","","","18,822","","","3.46","%","","539,461","","","21,469","","","3.98","%","","475,149","","","25,208","","","5.31","%"],["Installment and other consumer","90,129","","","5,351","","","5.94","%","","80,032","","","5,248","","","6.56","%","","72,283","","","5,173","","","7.16","%"],["Consumer construction","14,748","","","668","","","4.53","%","","13,484","","","594","","","4.40","%","","10,896","","","593","","","5.44","%"],["Total consumer loans","1,530,148","","","61,052","","","3.99","%","","1,597,717","","","68,309","","","4.28","%","","1,323,932","","","64,863","","","4.90","%"],["Total portfolio loans","7,080,555","","","271,949","","","3.84","%","","7,405,357","","","303,051","","","4.09","%","","6,123,360","","","303,406","","","4.95","%"],["Total Loans(1)(2)","7,084,649","","","272,073","","","3.84","%","","7,410,462","","","303,211","","","4.09","%","","6,125,529","","","303,490","","","4.95","%"],["Federal Home Loan Bank and other restricted stock","10,363","","","397","","","3.83","%","","18,234","","","929","","","5.10","%","","21,833","","","1,642","","","7.52","%"],["Total Interest-earning Assets","8,649,372","","","291,578","","","3.37","%","","8,372,894","","","323,666","","","3.87","%","","6,885,372","","","324,241","","","4.71","%"],["Noninterest-earning assets","726,478","","","","","","","779,853","","","","","","","550,164"],["Total Assets","$","9,375,850","","","","","","","$","9,152,747","","","","","","","$","7,435,536"],["LIABILITIES AND SHAREHOLDERS\u2019 EQUITY"],["Interest-bearing demand","$","956,211","","","$","809","","","0.08","%","","$","961,823","","","$","2,681","","","0.28","%","","$","641,403","","","$","3,915","","","0.61","%"],["Money market","2,033,631","","","3,651","","","0.18","%","","2,040,116","","","11,645","","","0.57","%","","1,691,910","","","30,236","","","1.79","%"],["Savings","1,047,855","","","366","","","0.03","%","","899,717","","","972","","","0.11","%","","766,142","","","1,928","","","0.25","%"],["Certificates of deposit","1,255,370","","","5,930","","","0.47","%","","1,517,643","","","20,688","","","1.36","%","","1,396,706","","","26,947","","","1.93","%"],["Total Interest-bearing deposits","5,293,066","","","10,757","","","0.20","%","","5,419,299","","","35,986","","","0.66","%","","4,496,161","","","63,026","","","1.40","%"],["Securities sold under repurchase agreements","69,964","","","79","","","0.11","%","","57,673","","","169","","","0.29","%","","16,863","","","110","","","0.65","%"],["Short-term borrowings","6,301","","","12","","","0.19","%","","155,753","","","1,434","","","0.92","%","","255,264","","","6,416","","","2.51","%"],["Long-term borrowings","22,995","","","458","","","1.99","%","","47,953","","","1,201","","","2.50","%","","66,392","","","1,831","","","2.76","%"],["Junior subordinated debt securities","61,653","","","1,843","","","2.99","%","","64,092","","","2,286","","","3.57","%","","47,934","","","2,310","","","4.82","%"],["Total borrowings","160,913","","","2,392","","","1.49","%","","325,471","","","5,090","","","1.56","%","","386,453","","","10,667","","","2.76","%"],["Total Interest-bearing Liabilities","5,453,979","","","13,150","","","0.24","%","","5,744,770","","","41,076","","","0.72","%","","4,882,614","","","73,693","","","1.51","%"],["Noninterest-bearing liabilities","2,735,710","","","","","","","2,238,488","","","","","","","1,569,014"],["Shareholders\u2019 equity","1,186,161","","","","","","","1,169,489","","","","","","","983,908"],["Total Liabilities and Shareholders\u2019 Equity","$","9,375,850","","","","","","","$","9,152,747","","","","","","","$","7,435,536"],["Net Interest Income (2)(3)","","","$","278,428","","","","","","","$","282,590","","","","","","","$","250,548"],["Net Interest Margin (2)(3)","","","","","3.22","%","","","","","","3.38","%","","","","","","3.64","%"]]
[[/GREPCENT_TABLE]]

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

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

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

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The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

[[GREPCENT_TABLE]]
[["","2021 Compared to 2020 Increase (Decrease) Due to","","2020 Compared to 2019 Increase (Decrease) Due to"],["(dollars in thousands)","Volume(4)","Rate(4)","Net","","Volume(4)","Rate(4)","Net"],["Interest earned on:"],["Interest-bearing deposits with banks","$","1,552","","$","(1,095)","","$","457","","","$","2,467","","$","(3,185)","","$","(718)"],["Securities at fair value(2)(3)","1,691","","(2,566)","","(875)","","","2,274","","(1,139)","","1,135"],["Loans held for sale","(32)","","(4)","","(36)","","","114","","(38)","","76"],["Commercial real estate","(4,094)","","(16,601)","","(20,695)","","","19,772","","(24,361)","","(4,589)"],["Commercial and industrial","(7,271)","","5,380","","(1,892)","","","22,326","","(24,003)","","(1,677)"],["Commercial construction","1,103","","(2,362)","","(1,259)","","","8,349","","(5,884)","","2,465"],["Total commercial loans","(10,262)","","(13,584)","","(23,846)","","","50,447","","(54,248)","","(3,801)"],["Residential mortgage","(3,538)","","(1,249)","","(4,787)","","","8,815","","(1,706)","","7,109"],["Home equity","172","","(2,819)","","(2,647)","","","3,412","","(7,151)","","(3,739)"],["Installment and other consumer","662","","(559)","","103","","","555","","(480)","","75"],["Consumer construction","56","","19","","74","","","141","","(140)","","1"],["Total consumer loans","(2,648)","","(4,609)","","(7,257)","","","12,923","","(9,477)","","3,446"],["Total portfolio loans","(12,910)","","(18,193)","","(31,103)","","","63,370","","(63,725)","","(355)"],["Total loans (1)(2)","(12,942)","","(18,197)","","(31,139)","","","63,484","","(63,763)","","(279)"],["Federal Home Loan Bank and other restricted stock","(401)","","(131)","","(533)","","","(271)","","(442)","","(713)"],["Change in Interest Earned on Interest-earning Assets","$","(10,100)","","$","(21,989)","","$","(32,089)","","","$","67,954","","$","(68,529)","","$","(575)"],["Interest paid on:"],["Interest-bearing demand","$","(16)","","$","(1,857)","","$","(1,872)","","","$","1,956","","$","(3,190)","","$","(1,234)"],["Money market","(37)","","(7,957)","","(7,994)","","","6,223","","(24,814)","","(18,591)"],["Savings","160","","(765)","","(605)","","","336","","(1,292)","","(956)"],["Certificates of deposit","(3,575)","","(11,182)","","(14,757)","","","2,333","","(8,592)","","(6,259)"],["Total interest-bearing deposits","(3,468)","","(21,761)","","(25,229)","","","10,848","","(37,888)","","(27,040)"],["Securities sold under repurchase agreements","36","","(126)","","(90)","","","266","","(207)","","59"],["Short-term borrowings","(1,376)","","(46)","","(1,422)","","","(2,501)","","(2,481)","","(4,982)"],["Long-term borrowings","(625)","","(118)","","(743)","","","(509)","","(121)","","(630)"],["Junior subordinated debt securities","(87)","","(356)","","(443)","","","779","","(803)","","(24)"],["Total borrowings","(2,052)","","(645)","","(2,697)","","","(1,965)","","(3,612)","","(5,577)"],["Change in Interest Paid on Interest-bearing Liabilities","$","(5,520)","","$","(22,406)","","$","(27,926)","","","$","8,883","","$","(41,500)","","$","(32,617)"],["Change in Net Interest Income","$","(4,580)","","$","417","","$","(4,163)","","","$","59,071","","$","(27,029)","","$","32,042"]]
[[/GREPCENT_TABLE]]

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

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

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

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

Net interest income on an FTE basis (non-GAAP) decreased $4.2 million compared to 2020. The decline was primarily due to lower average loan balances compared to 2020. Net interest income was favorably impacted by PPP loans which contributed $17.3 million compared to $11.4 million in 2020. The net interest margin, or NIM, on an FTE basis (non-GAAP) decreased 16 basis points compared to 2020. The decrease is primarily due to higher average cash balances and the low interest rate environment. PPP loans positively impacted the net interest margin on an FTE basis (non-GAAP) by 8 basis points compared to the negative impact of 3 basis points in 2020.

Interest income on an FTE basis (non-GAAP) decreased $32.1 million compared to 2020. The decrease in interest income was primarily due to lower average loan balances compared to 2020 and the continued low interest rate environment. Average loan balances decreased $325.8 million compared to 2020. Average PPP loans decreased $53.7 million compared to 2020. The average rate earned on loans decreased 25 basis points primarily due to lower short-term interest rates. Average interest-bearing deposits with banks increased $542.2 million compared to 2020 due to PPP loan forgiveness, lower loan balances and a significant increase in average deposits as a result of customer PPP loans and stimulus payments along with customers' liquidity preferences. Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 50 basis points compared to 2020.

Interest expense decreased $27.9 million compared to 2020. The decrease was primarily due to lower short-term interest

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rates. Average interest-bearing deposits decreased $126.2 million compared to 2020. The average rate paid on interest-bearing deposits decreased 46 basis points compared to 2020 primarily due to lower short-term interest rates. The interest-bearing deposit decreases are favorably offset by a $521.8 million increase in demand deposits. We experienced demand deposit growth due to customer PPP loans and stimulus payments along with customers' liquidity preferences. Brokered deposits decreased $216.0 million and borrowings decreased $164.6 million compared to 2020 due to maturities and a reduced need for wholesale funding. Overall, the cost of interest-bearing liabilities decreased 48 basis points compared to 2020.

Provision for Credit Losses

The provision for credit losses, which includes a provision for losses on loans and on unfunded loan commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date. The provision for credit losses decreased $115.2 million to $16.2 million for 2021 compared to $131.4 million for 2020. Excluding the customer fraud loss of $58.7 million, the provision for credit losses was $72.7 million for 2020.

The significant decrease in the provision for credit losses during 2021 was mainly due to the customer fraud in 2020 and an improved outlook for the economy and our loan portfolio. Our total qualitative reserve decreased $7.3 million compared to 2020. The decrease was primarily due to improved economic conditions offset by additional segment allocations for our healthcare and C&I portfolios along with the increased uncertainty at year-end related to the COVID-19 Omicron variant. Specific reserves on loans individually assessed decreased $11.7 million to $1.8 million at December 31, 2021 compared to $13.5 million in 2020. The decrease in specific reserves was the result of approximately $7.8 million of loan charge-offs and the release of $5.7 million of specific reserves due to improved operating performance within our hotel portfolio. Offsetting this decrease in specific reserve was the addition of a $1.8 million specific reserve related to a $21.7 million C&I relationship that also had a $10.3 million charge-off in 2021 based on an estimated enterprise value of the company.

Net loan charge-offs were $34.5 million, or 0.49 percent of average loans, in 2021 compared to $103.4 million, or 1.40 percent of average loans, during 2020. Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.61 percent of average loans in 2020. The decrease in net loan charge-offs in 2021 was primarily due to improving economic conditions.

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

Noninterest Income

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(dollars in thousands)","2021","","2020","","$ Change","","% Change"],["Debit and credit card","17,952","","","15,093","","","2,859","","","18.9","%"],["Service charges on deposit accounts","15,040","","","13,597","","","1,443","","","10.6","%"],["Wealth management","12,889","","","9,957","","","2,932","","","29.4","%"],["Mortgage banking","9,734","","","10,923","","","(1,189)","","","(10.9)","%"],["Commercial loan swap income","1,146","","","4,740","","","(3,594)","","","(75.8)","%"],["Securities gains, net","$","29","","","$","142","","","$","(113)","","","(79.6)","%"],["Other","7,820","","","5,267","","","2,553","","","48.5","%"],["Total Noninterest Income","$","64,610","","","$","59,719","","","$","4,891","","","8.2","%"]]
[[/GREPCENT_TABLE]]

Noninterest income increased $4.9 million, or 8.2 percent, in 2021 compared to 2020. Wealth management fees increased $2.9 million compared to the prior year. Brokerage fees increased $1.6 million primarily due to the addition of six new financial advisors added during 2021. Trust income increased $1.3 million mainly due to new customer growth resulting in higher assets under management and improved market conditions. Debit and credit card fees increased $2.9 million due to increased debit and credit card usage. Other noninterest income increased $2.6 million due to a $1.4 million change in the credit valuation adjustment for our commercial loan swaps for risk associated with our hotel loan portfolio, a $0.8 million change in the equity securities portfolio and a $0.5 million change in the valuation of a deferred compensation plan, which has a corresponding offset in salaries and benefit expense resulting in no impact to net income. Service charges on deposit accounts increased $1.4 million due to the improving economic environment which drove higher customer activity. Commercial loan swap income decreased $3.6 million due to the lower customer activity related to the pandemic and interest rate environment. Mortgage banking decreased $1.2 million due to changes in the valuation of the mortgage interest rate locks offset by an improved mortgage servicing rights valuation compared to 2020.

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Noninterest Expense

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(dollars in thousands)","2021","","2020","","$ Change","","% Change"],["Salaries and employee benefits","$","100,214","","","$","90,115","","","$","10,099","","","11.2","%"],["Data processing and information technology","16,681","","","15,499","","","1,182","","","7.6","%"],["Occupancy","14,544","","","14,529","","","15","","","0.1","%"],["Furniture, equipment and software","10,684","","","11,050","","","(366)","","","(3.3)","%"],["Other taxes","6,644","","","6,622","","","22","","","0.3","%"],["Professional services and legal","6,368","","","6,394","","","(26)","","","(0.4)","%"],["Marketing","4,553","","","5,996","","","(1,443)","","","(24.1)","%"],["FDIC insurance","4,224","","","5,089","","","(865)","","","(17.0)","%"],["Merger-related expenses","\u2014","","","2,342","","","(2,342)","","","NM"],["Other","24,927","","","29,008","","","(4,081)","","","(14.1)","%"],["Total Other Noninterest Expense","$","188,839","","","$","186,644","","","$","2,195","","","1.2","%"]]
[[/GREPCENT_TABLE]]

NM - percentage not meaningful

Noninterest expense increased $2.2 million, or 1.2 percent, to $188.8 million in 2021 compared to 2020. Total merger-related expense decreased $2.3 million compared to 2020 due to no merger during 2021. Salaries and employee benefits increased $10.1 million during 2021 primarily due to higher incentive, restricted stock, commissions and pension expense due to an increase in retirees electing lump-sum distributions. Data processing and information technology increased $1.2 million due to new products and services in 2021. Offsetting these increases, other noninterest expense decreased $4.1 million due to lower loan related expenses and lower amortization of both our qualified affordable housing projects and core deposit intangible assets. Marketing expense decreased $1.4 million due to the pandemic and a reduction in promotions. FDIC insurance decreased $0.9 million due to the improvement of the financial ratios used to determine the assessment.

Income Taxes

The provision for income taxes increased to $25.3 million in 2021 compared to nearly zero for 2020. The increase in our income tax provision was primarily due to a $114.6 million increase in income before taxes in 2021 compared to 2020 when income before taxes was impacted by a customer fraud of $58.7 million.

The effective tax rate, which is total tax expense as a percentage of income before taxes, increased to 18.7 percent in 2021 compared to a nominal negative annual effective tax rate in 2020. The increase in the effective tax rate was primarily due to significantly higher income before taxes in 2021 compared to 2020. Historically, we have generated an annual effective tax rate that is less than the statutory rate of 21 percent due to benefits resulting from tax-exempt interest, excludable dividend income, tax-exempt income on Bank Owned Life Insurance, or BOLI, and tax benefits associated with Low Income Housing Tax Credits, or LIHTC.

Results of Operations

Year Ended December 31, 2020

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

Net interest income increased $32.6 million, or 13.2 percent, to $279.4 million compared to $246.8 million in 2019 primarily due to the merger with DNB in late 2019. Average interest-earnings assets increased $1.5 billion, or 21.6 percent, to $8.4 billion compared to 2019. 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 above in the "Results of Operations - Year Ended December 31, 2021 -Net Interest Income" section of this MD&A.

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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.

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

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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:

[[GREPCENT_TABLE]]
[["","2020","","2019","","2018"],["(dollars in thousands)","Average Balance","","Interest","","Rate","","Average Balance","","Interest","","Rate","","Average Balance","","Interest","","Rate"],["ASSETS"],["Interest-bearing deposits with banks","$","179,887","","","$","515","","","0.29","%","","$","59,941","","","$","1,233","","","2.06","%","","$","56,210","","","$","1,042","","","1.85","%"],["Securities at fair value(2)(3)","764,311","","","19,011","","","2.49","%","","678,069","","","17,876","","","2.64","%","","682,806","","","17,860","","","2.62","%"],["Loans held for sale","5,105","","","160","","","3.13","%","","2,169","","","84","","","3.88","%","","1,515","","","85","","","5.60","%"],["Commercial real estate","3,347,234","","","140,288","","","4.19","%","","2,945,278","","","144,877","","","4.92","%","","2,779,096","","","132,139","","","4.75","%"],["Commercial and industrial","2,018,318","","","77,752","","","3.85","%","","1,575,485","","","79,429","","","5.04","%","","1,441,560","","","67,770","","","4.70","%"],["Commercial construction","442,088","","","16,702","","","3.78","%","","278,665","","","14,237","","","5.11","%","","314,265","","","15,067","","","4.79","%"],["Total commercial loans","5,807,640","","","234,742","","","4.04","%","","4,799,428","","","238,543","","","4.97","%","","4,534,921","","","214,976","","","4.74","%"],["Residential mortgage","964,740","","","40,998","","","4.25","%","","765,604","","","33,889","","","4.43","%","","696,849","","","29,772","","","4.27","%"],["Home equity","539,461","","","21,469","","","3.98","%","","475,149","","","25,208","","","5.31","%","","474,538","","","22,981","","","4.84","%"],["Installment and other consumer","80,032","","","5,248","","","6.56","%","","72,283","","","5,173","","","7.16","%","","67,047","","","4,594","","","6.85","%"],["Consumer construction","13,484","","","594","","","4.40","%","","10,896","","","593","","","5.44","%","","5,336","","","267","","","5.00","%"],["Total consumer loans","1,597,717","","","68,309","","","4.28","%","","1,323,932","","","64,863","","","4.90","%","","1,243,770","","","57,614","","","4.63","%"],["Total portfolio loans","7,405,357","","","303,051","","","4.09","%","","6,123,360","","","303,406","","","4.95","%","","5,778,691","","","272,590","","","4.72","%"],["Total Loans(1)(2)","7,410,462","","","303,211","","","4.09","%","","6,125,529","","","303,490","","","4.95","%","","5,780,206","","","272,675","","","4.72","%"],["Federal Home Loan Bank and other restricted stock","18,234","","","929","","","5.10","%","","21,833","","","1,642","","","7.52","%","","30,457","","","2,052","","","6.74","%"],["Total Interest-earning Assets","8,372,894","","","304,140","","","3.87","%","","6,885,372","","","324,241","","","4.71","%","","6,549,679","","","293,629","","","4.48","%"],["Noninterest-earning assets","779,853","","","","","","","550,164","","","","","","","494,149"],["Total Assets","$","9,152,747","","","","","","","$","7,435,536","","","","","","","$","7,043,828"],["LIABILITIES AND SHAREHOLDERS\u2019 EQUITY"],["Interest-bearing demand","$","961,823","","","$","2,681","","","0.28","%","","$","641,403","","","$","3,915","","","0.61","%","","$","570,459","","","$","1,883","","","0.33","%"],["Money market","2,040,116","","","11,645","","","0.57","%","","1,691,910","","","30,236","","","1.79","%","","1,299,185","","","18,228","","","1.40","%"],["Savings","899,717","","","972","","","0.11","%","","766,142","","","1,928","","","0.25","%","","836,747","","","1,773","","","0.21","%"],["Certificates of deposit","1,517,643","","","20,688","","","1.36","%","","1,396,706","","","26,947","","","1.93","%","","1,328,985","","","18,972","","","1.43","%"],["Total Interest-bearing deposits","5,419,299","","","35,986","","","0.66","%","","4,496,161","","","63,026","","","1.40","%","","4,035,376","","","40,856","","","1.01","%"],["Securities sold under repurchase agreements","57,673","","","169","","","0.29","%","","16,863","","","110","","","0.65","%","","45,992","","","221","","","0.48","%"],["Short-term borrowings","155,753","","","1,434","","","0.92","%","","255,264","","","6,416","","","2.51","%","","525,172","","","11,082","","","2.11","%"],["Long-term borrowings","47,953","","","1,201","","","2.50","%","","66,392","","","1,831","","","2.76","%","","47,986","","","1,129","","","2.35","%"],["Junior subordinated debt securities","64,092","","","2,286","","","3.57","%","","47,934","","","2,310","","","4.82","%","","45,619","","","2,100","","","4.60","%"],["Total borrowings","325,471","","","5,090","","","1.56","%","","386,453","","","10,667","","","2.76","%","","664,769","","","14,532","","","2.19","%"],["Total Interest-bearing Liabilities","5,744,770","","","41,076","","","0.72","%","","4,882,614","","","73,693","","","1.51","%","","4,700,145","","","55,388","","","1.18","%"],["Noninterest-bearing liabilities","2,238,488","","","","","","","1,569,014","","","","","","","1,435,328"],["Shareholders\u2019 equity","1,169,489","","","","","","","983,908","","","","","","","908,355"],["Total Liabilities and Shareholders\u2019 Equity","$","9,152,747","","","","","","","$","7,435,536","","","","","","","$","7,043,828"],["Net Interest Income (2)(3)","","","$","282,590","","","","","","","$","250,548","","","","","","","$","238,241"],["Net Interest Margin (2)(3)","","","","","3.38","%","","","","","","3.64","%","","","","","","3.64","%"]]
[[/GREPCENT_TABLE]]
(1)Nonaccruing loans are included in the daily average loan amounts outstanding.

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

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

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The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

[[GREPCENT_TABLE]]
[["","2020 Compared to 2019 Increase (Decrease) Due to","","2019 Compared to 2018 Increase (Decrease) Due to"],["(dollars in thousands)","Volume(4)","Rate(4)","Net","","Volume(4)","Rate(4)","Net"],["Interest earned on:"],["Interest-bearing deposits with banks","$","2,467","","$","(3,185)","","$","(718)","","","$","69","","$","122","","$","191"],["Securities at fair value(2)(3)","2,274","","(1,139)","","1,135","","","(124)","","140","","16"],["Loans held for sale","114","","(38)","","76","","","37","","(38)","","(1)"],["Commercial real estate","19,772","","(24,361)","","(4,589)","","","7,902","","4,836","","12,738"],["Commercial and industrial","22,326","","(24,003)","","(1,677)","","","6,296","","5,363","","11,659"],["Commercial construction","8,349","","(5,884)","","2,465","","","(1,707)","","877","","(830)"],["Total commercial loans","50,447","","(54,248)","","(3,801)","","","12,491","","11,076","","23,567"],["Residential mortgage","8,815","","(1,706)","","7,109","","","2,937","","1,180","","4,117"],["Home equity","3,412","","(7,151)","","(3,739)","","","30","","2,197","","2,227"],["Installment and other consumer","555","","(480)","","75","","","359","","220","","579"],["Consumer construction","141","","(140)","","1","","","278","","48","","326"],["Total consumer loans","12,923","","(9,477)","","3,446","","","3,604","","3,645","","7,249"],["Total portfolio loans","63,370","","(63,725)","","(355)","","","16,095","","14,721","","30,816"],["Total loans (1)(2)","63,484","","(63,763)","","(279)","","","16,132","","14,683","","30,815"],["Federal Home Loan Bank and other restricted stock","(271)","","(442)","","(713)","","","(581)","","171","","(410)"],["Change in Interest Earned on Interest-earning Assets","$","67,954","","$","(68,529)","","$","(575)","","","$","15,496","","$","15,116","","$","30,612"],["Interest paid on:"],["Interest-bearing demand","$","1,956","","$","(3,190)","","$","(1,234)","","","$","234","","$","1,798","","$","2,032"],["Money market","6,223","","(24,814)","","(18,591)","","","5,510","","6,498","","12,008"],["Savings","336","","(1,292)","","(956)","","","(150)","","305","","155"],["Certificates of deposit","2,333","","(8,592)","","(6,259)","","","967","","7,008","","7,975"],["Total interest-bearing deposits","10,848","","(37,888)","","(27,040)","","","6,561","","15,609","","22,170"],["Securities sold under repurchase agreements","266","","(207)","","59","","","(140)","","29","","(111)"],["Short-term borrowings","(2,501)","","(2,481)","","(4,982)","","","(5,696)","","1,030","","(4,666)"],["Long-term borrowings","(509)","","(121)","","(630)","","","433","","269","","702"],["Junior subordinated debt securities","779","","(803)","","(24)","","","107","","103","","210"],["Total borrowings","(1,965)","","(3,612)","","(5,577)","","","(5,296)","","1,431","","(3,865)"],["Change in Interest Paid on Interest-bearing Liabilities","$","8,883","","$","(41,500)","","$","(32,617)","","","$","1,265","","$","17,040","","$","18,305"],["Change in Net Interest Income","$","59,071","","$","(27,029)","","$","32,042","","","$","14,231","","$","(1,924)","","$","12,307"]]
[[/GREPCENT_TABLE]]
(1)Nonaccruing loans are included in the daily average loan amounts outstanding.

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

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

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

Net interest income on an FTE basis (non-GAAP) increased $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 percent compared to 2019. This is mostly due to decreases in short-term interest rates of approximately 225 basis points. Purchase accounting fair value adjustments favorably impacted the net interest margin rate on an FTE basis by 6 basis points for 2020.

Interest income on an FTE basis (non-GAAP) decreased $0.6 million, or 0.2 percent, compared to 2019. The change was primarily due to increases in average interest-earning assets of $1.5 billion offset by lower short-term interest rates compared to 2019. Average loan balances increased $1.3 billion compared to 2019 due to the DNB merger and organic loan growth. PPP loans contributed $380.1 million of the average increase in loans. The average rate earned on loans decreased 86 basis points primarily due to lower short-term interest rates. Average interest-bearing deposits with banks increased $119.9 million and the average rate earned decreased 177 basis points compared to 2019. Average investment securities increased $86.2 million and the average rate earned decreased 15 basis points. Overall, the FTE rate on interest-earning assets (non-GAAP) decreased 84 basis points compared to 2019.

Interest expense decreased $32.6 million compared to 2019. The decrease was primarily due to lower short-term interest

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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 pandemic 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 percent of average loans, in 2020 compared to $13.6 million, or 0.22 percent of average loans, during 2019. Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.60 percent in 2020.

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

Noninterest Income

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(dollars in thousands)","2020","","2019","","$ Change","","% Change"],["Securities gains (losses), net","$","142","","","$","(26)","","","$","168","","","NM"],["Debit and credit card","15,093","","","13,405","","","1,688","","","12.6","%"],["Service charges on deposit accounts","13,597","","","13,316","","","281","","","2.1","%"],["Mortgage banking","10,923","","","2,491","","","8,432","","","338.5","%"],["Wealth management","9,957","","","8,623","","","1,334","","","15.5","%"],["Commercial loan swap income","4,740","","","5,503","","","(763)","","","(13.9)","%"],["Other","5,267","","","9,246","","","(3,979)","","","(43.0)","%"],["Total Noninterest Income","$","59,719","","","$","52,558","","","$","7,161","","","13.6","%"]]
[[/GREPCENT_TABLE]]
NM- percentage change not meaningful

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

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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 DNB Merger. Wealth management fees increased $1.3 million due to the DNB Merger. The $3.9 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.

Noninterest Expense

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(dollars in thousands)","2020","","2019","","$ Change","","% Change"],["Salaries and employee benefits","$","90,115","","","$","83,986","","","$","6,129","","","7.3","%"],["Data processing and information technology","15,499","","","14,468","","","1,031","","","7.1","%"],["Occupancy","14,529","","","12,103","","","2,426","","","20.0","%"],["Merger-related expenses","2,342","","","11,350","","","(9,008)","","","NM"],["Furniture, equipment and software","11,050","","","8,958","","","2,092","","","23.4","%"],["Marketing","5,996","","","4,631","","","1,365","","","29.5","%"],["Professional services and legal","6,394","","","4,244","","","2,150","","","50.7","%"],["Other taxes","6,622","","","3,364","","","3,258","","","96.8","%"],["FDIC insurance","5,089","","","758","","","4,331","","","571.4","%"],["Other expenses:"],["Loan related expenses","5,044","","","3,250","","","1,794","","","55.2","%"],["Joint venture amortization","3,215","","","2,648","","","567","","","21.4","%"],["Supplies","1,318","","","1,159","","","159","","","13.7","%"],["Postage","1,262","","","1,082","","","180","","","16.6","%"],["Amortization of intangibles","2,531","","","836","","","1,695","","","202.8","%"],["Other","15,638","","","14,279","","","1,359","","","9.5","%"],["Total Other Noninterest Expense","29,008","","","23,254","","","5,754","","","24.7","%"],["Total Noninterest Expense","$","186,644","","","$","167,116","","","$","19,528","","","11.7","%"]]
[[/GREPCENT_TABLE]]
NM - percentage not meaningful

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.

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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.

Financial Condition

December 31, 2021

Total assets increased $520.6 million to $9.5 billion at December 31, 2021 compared to $9.0 billion at December 31, 2020. Cash and due from banks increased $692.5 million to $922.2 million at December 30, 2021 compared to $229.7 million at December 31, 2020 due to PPP forgiveness and a significant increase in deposits as a result of government stimulus programs, a second round of PPP loans and our customers' liquidity preferences. Total portfolio loans decreased $225.9 million to $7.0 billion at December 31, 2021 compared to $7.2 billion at December 31, 2020. The decrease in portfolio loans is primarily related to decreases in the commercial loan portfolio of $267.1 million with decreases of $225.5 million in C&I, which included a decrease of $377.2 million of loans from the PPP, and a decrease of $33.3 million in commercial construction compared to December 31, 2020. Excluding the PPP loans, portfolio loans increased $151.3 million compared to December 31, 2020 due a modest increase in activity as the economic outlook improved. Consumer loans increased $41.3 million compared to December 31, 2020 primarily due to an increase of $29.1 million in the home equity portfolio and $27.0 million in installment and other consumer loans offset by a decrease in the residential mortgage portfolio of $18.4 million.

Securities increased $137.1 million to $910.8 million at December 31, 2021 from $773.7 million at December 31, 2020. The increase in securities is primarily due to a resumption in overall investing activities mainly during the second half of the year due to the increasing interest rate environment and the cash position. The bond portfolio had an unrealized gain of $9.4 million at December 31, 2021 compared to $33.4 million at December 31, 2020 due to an increase in interest rates.

Our deposits increased $576.0 million, with total deposits of $8.0 billion at December 31, 2021 compared to $7.4 billion at December 31, 2020. Customer deposits increased $639.2 million from December 31, 2020. 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 $486.6 million, interest-bearing demand increased $114.6 million, money market deposits increased $183.5 million and savings increased $140.6 million offset by a decrease in certificates of deposit of $286.2 million. Total brokered deposits decreased $63.2 million from December 31, 2020 due to a reduced need for wholesale funding given the customer deposit growth.

Total borrowings decreased $66.6 million to $161.3 million at December 31, 2021 compared to $227.9 million at December 31, 2020 due to an increase in customer deposits. The decrease in borrowings primarily related to a decline in short-term borrowings of $75.0 million offset by an increase in securities sold under repurchase agreements of $19.3 million due to demand for the product by our repurchase agreements, or REPO, customers.

Total shareholders’ equity increased $51.7 million to $1.2 billion at December 31, 2021 compared to $1.2 billion at December 31, 2020. The increase was primarily due to net income of $110.3 million offset partially by dividends of $44.3 million and a decrease in other comprehensive income of $16.1 million. The decrease in other comprehensive income was mainly due to a decrease of $18.9 million, net of tax, in unrealized gains on our available-for-sale investment securities due to higher interest rates.

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Securities Activity

The balances and average rates of our securities portfolio are presented below as of December 31:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["(dollars in thousands)","Balance","","Weighted-Average Yield","","Balance","","Weighted-Average Yield","","Balance","","Weighted-Average Yield"],["U.S. Treasury securities","$","95,327","","","1.26","%","","$","10,282","","","1.87","%","","$","10,040","","","1.87","%"],["Obligations of U.S. government corporations and agencies","70,348","","","2.29","%","","82,904","","","2.28","%","","157,697","","","2.20","%"],["Collateralized mortgage obligations of U.S. government corporations and agencies","270,294","","","1.97","%","","209,296","","","2.23","%","","189,348","","","2.68","%"],["Residential mortgage-backed securities of U.S. government corporations and agencies","56,793","","","1.57","%","","67,778","","","1.26","%","","22,418","","","2.95","%"],["Commercial mortgage-backed securities of U.S. government corporations and agencies","341,300","","","2.09","%","","273,681","","","2.41","%","","275,870","","","2.42","%"],["Corporate securities","500","","","3.22","%","","2,025","","","3.90","%","","7,627","","","4.35","%"],["Obligations of states and political subdivisions (1)","75,089","","","3.28","%","","124,427","","","3.49","%","","116,133","","","3.45","%"],["Marketable equity securities","1,142","","","2.93","%","","3,300","","","2.90","%","","5,150","","","2.77","%"],["Total Securities","$","910,793","","","2.05","%","","$","773,693","","","2.42","%","","$","784,283","","","2.56","%"]]
[[/GREPCENT_TABLE]]

(1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent for 2021, 2020 and 2019.

We invest in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income, and as a tool of ALCO to reposition the balance sheet for interest rate risk purposes. Securities are subject to market risks that could negatively affect the level of liquidity available to us. Security purchases are subject to an investment policy approved annually by our Board of Directors and administered through ALCO and our treasury function. Securities increased $137.1 million to $910.8 million at December 31, 2021 from $773.7 million at December 31, 2020. The increase in securities is primarily due to an increase in overall investing activities due to excess liquidity. These increases were partially offset by reductions in unrealized gains due to a rising interest rate environment.

At December 31, 2021 our bond portfolio was in a net unrealized gain position of $9.4 million compared to a net unrealized gain position of $33.4 million at December 31, 2020. At December 31, 2021, total gross unrealized gains in the bond portfolio were $15.2 million offset by gross unrealized losses of $5.8 million compared to December 31, 2020, when total gross unrealized gains were $33.5 million offset by gross unrealized losses of $0.1 million. The decrease in the net unrealized gain position was primarily due to an increase in interest rates from December 31, 2020 to December 31, 2021. 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, 2021 or 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, 2021. 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 2021, 2020 or 2019. The performance of the debt securities markets could generate impairments in future periods requiring realized losses to be reported.

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The following table sets forth the maturities of securities at December 31, 2021 and the weighted average yields of such securities. Taxable-equivalent adjustments for 2021 have been made in calculating yields on obligations of state and political subdivisions.

[[GREPCENT_TABLE]]
[["","Maturing"],["","Within One Year","","After One But within Five Years","","After Five But Within Ten Years","","After Ten Years","","No Fixed Maturity"],["(dollars in thousands)","Amount","Yield","","Amount","Yield","","Amount","Yield","","Amount","Yield","","Amount","Yield"],["Available-for-Sale"],["U.S. Treasury securities","$","10,107","","1.87","%","","$","\u2014","","\u2014","%","","$","85,221","","1.19","%","","$","\u2014","","\u2014","%","","$","\u2014","","\u2014","%"],["Obligations of U.S. government corporations and agencies","25,201","","2.25","%","","45,146","","2.32","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%"],["Collateralized mortgage obligations of U.S. government corporations and agencies","\u2014","","\u2014","%","","4,630","","2.46","%","","69,824","","3.00","%","","195,840","","1.60","%","","\u2014","","\u2014%"],["Residential mortgage-backed securities of U.S. government corporations and agencies","\u2014","","\u2014","%","","2,001","","3.60","%","","1,974","","2.32","%","","52,819","","1.47","%","","\u2014","","\u2014","%"],["Commercial mortgage-backed securities of U.S. government corporations and agencies","10,066","","2.37","%","","215,185","","2.41","%","","116,048","","1.47","%","","\u2014","","\u2014","%","","\u2014","","\u2014%"],["Obligations of states and political subdivisions (1)","8,720","","3.37","%","","21,216","","3.09","%","","22,206","","3.56","%","","22,947","","3.14","%","","\u2014","","\u2014","%"],["Corporate bonds","\u2014","","\u2014","%","","500","","3.22","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%"],["Marketable equity securities","\u2014","","\u2014","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","1,142","","2.93","%"],["Total","$","54,094","","","","$","288,678","","","","$","295,273","","","","$","271,606","","","","$","1,142"],["Weighted Average Yield","","2.38","%","","","2.45","%","","","1.91","%","","","1.70","%","","","2.93","%"]]
[[/GREPCENT_TABLE]]

(1) Weighted-average yields are calculated on a taxable-equivalent basis using the federal statutory tax rate of 21 percent for 2021.

Lending Activity

The following table summarizes our loan portfolio as of December 31:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019","","2018","","2017"],["(dollars in thousands)","Amount","","% of Total","","Amount","","% of Total","","Amount","","% of Total","","Amount","","% of Total","","Amount","","% of Total"],["Commercial"],["Commercial real estate","$","3,236,653","","","46.2","%","","$","3,244,974","","","44.9","%","","$","3,416,518","","","47.9","%","","$","2,921,832","","","49.1","%","","$","2,685,994","","","44.6","%"],["Commercial and industrial","1,728,969","","","24.7","%","","1,954,453","","","27.0","%","","1,720,833","","","24.1","%","","1,493,416","","","25.1","%","","1,433,266","","","24.9","%"],["Commercial construction","440,962","","","6.3","%","","474,280","","","6.6","%","","375,445","","","5.3","%","","257,197","","","4.3","%","","384,334","","","6.7","%"],["Total Commercial Loans","5,406,584","","","77.2","%","","5,673,706","","","78.5","%","","5,512,796","","","77.2","%","","4,672,445","","","78.6","%","","4,503,594","","","78.2","%"],["Consumer"],["Residential mortgage","899,956","","","12.9","%","","918,398","","","12.7","%","","998,585","","","14.0","%","","726,679","","","12.2","%","","698,774","","","12.1","%"],["Home equity","564,219","","","8.1","%","","535,165","","","7.4","%","","538,348","","","7.5","%","","471,562","","","7.9","%","","487,326","","","8.5","%"],["Installment and other consumer","107,928","","","1.5","%","","80,915","","","1.1","%","","79,033","","","1.1","%","","67,546","","","1.1","%","","67,204","","","1.2","%"],["Consumer construction","21,303","","","0.3","%","","17,675","","","0.2","%","","8,390","","","0.1","%","","8,416","","","0.1","%","","4,551","","","0.1","%"],["Total Consumer Loans","1,593,406","","","22.8","%","","1,552,153","","","21.5","%","","1,624,356","","","22.8","%","","1,274,203","","","21.4","%","","1,257,855","","","21.8","%"],["Total Portfolio Loans","$","6,999,990","","","100.0","%","","$","7,225,859","","","100.0","%","","$","7,137,152","","","100.0","%","","$","5,946,648","","","100.0","%","","$","5,761,449","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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 decreased $225.9 million, or 3.1 percent, to $7.0 billion at December 31, 2021 compared to $7.2 billion at December 31, 2020. Commercial and industrial loans, or C&I, included $88.3 million of loans originated under the PPP at December 31, 2021. On March 27, 2020, the CARES Act was signed into law. The CARES Act included the PPP, a

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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.

As of December 31, 2021, 74 percent of our total loans were variable rate loans and 26 percent were fixed rate loans. Commercial loans, including CRE, C&I and commercial construction, comprised 77.2 percent of total portfolio loans at December 31, 2021 and 78.5 percent at December 31, 2020. The decrease of $267.1 million in commercial loans related to $225.5 million in C&I, which included a decrease of $377.1 million of loans from the PPP, and a decrease of $33.3 million in commercial construction loans compared to December 31, 2020. Excluding the PPP loans, portfolio loans increased $151.3 million compared to December 31, 2020. Our loan demand was influenced by the pandemic during 2021, but we did see loan growth in the second half of 2021.

Consumer loans represent 22.8 percent of our total portfolio loans at December 31, 2021 and 21.5 percent at December 31, 2020. Consumer loans increased $41.3 million compared to December 31, 2020 primarily due to an increase of $29.1 million in the home equity portfolio and $27.0 million in installment and other consumer loans offset by a decrease in the residential mortgage portfolio of $18.4 million. Much of this growth came from our Eastern Pennsylvania market.

Residential mortgage lending continues to be a focus for us. The loan to value, or LTV, policy guideline is 80 percent for residential first lien mortgages. Higher LTV loans may be approved within unique program guidelines and the appropriate private mortgage insurance coverage. We originate traditional fixed rate mortgage loans and adjustable rate or balloon mortgages with a maximum amortization term of 30 years. We may originate home equity loans with a lien position that is second to unrelated third party lenders, but normally only to the extent that the combined LTV considering both the first and second liens does not exceed 100 percent of the fair value of the property. Combo mortgage loans consisting of a residential first mortgage and a home equity second mortgage are also available.

We originate and sell loans into the secondary market, primarily to Fannie Mae. We sell these loans in order to mitigate interest-rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing of the loans. We sold $288.3 million of 1-4 family mortgages in 2021 and $345.1 million in 2020 to Fannie Mae. Our servicing portfolio of mortgage loans that we had originated and sold into the secondary market was $841.7 million at December 31, 2021 compared to $718.2 million at December 31, 2020.

We also offer a variety of unsecured and secured consumer loan products.

The following table presents the maturity of commercial and consumer loans outstanding as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Maturity"],["(dollars in thousands)","Within One Year","","After One But Within Five Years","","After Five Years through 15 years","","After 15 years","","Total"],["Fixed interest rates","$","247,852","","","$","700,593","","","$","302,349","","","$","17,995","","","$","1,268,788"],["Variable interest rates","883,641","","","1,859,126","","","1,299,190","","","95,840","","","4,137,796"],["Total Commercial Loans","$","1,131,493","","","$","2,559,719","","","$","1,601,538","","","$","113,834","","","$","5,406,584"],["Fixed interest rates","$","56,152","","","$","167,291","","","$","252,522","","","$","56,744","","","$","532,710"],["Variable interest rates","539,454","","","113,069","","","277,759","","","130,413","","","1,060,696"],["Total Consumer Loans","$","595,606","","","$","280,361","","","$","530,282","","","$","187,157","","","$","1,593,406"],["Total Portfolio Loans","$","1,727,099","","","$","2,840,080","","","$","2,131,820","","","$","300,992","","","$","6,999,990"]]
[[/GREPCENT_TABLE]]

Off Balance Sheet Arrangements

In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that are used for the underwriting of loans to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The following table sets forth our commitments and letters of credit as of the dates presented:

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[[GREPCENT_TABLE]]
[["","December 31,"],["(dollars in thousands)","2021","","2020"],["Commitments to extend credit","$","2,583,957","","","$","2,185,752"],["Standby letters of credit","87,335","","89,095"],["Total","$","2,671,292","","","$","2,274,847"]]
[[/GREPCENT_TABLE]]

See Note 19 Commitments and Contingencies in Part II, Item 8. Financial Statements and Supplementary Data of this Report for details on allowance for credit losses on unfunded commitments.

Credit Quality

On a quarterly basis, a criticized asset meeting is held to monitor all special mention and substandard loans greater than $1.5 million and to establish action plans for these loans. These loans typically represent the highest risk of loss to us. 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, at least annually, and updates of our lending policies and procedures to support sound underwriting practices and portfolio management through portfolio stress testing. We have a portfolio monitoring process in place that includes an annual review of all commercial relationships greater than $1.5 million. Business banking relationships less than $1.5 million are monitored through portfolio management software that identifies credit risk indicators. Our Credit Risk Review process serves to independently monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all corporate lending activities. The Credit Risk Review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process.

Nonperforming assets, or NPAs, consist of nonaccrual loans, nonaccrual TDRs and OREO. The following represents NPAs as of December 31:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","2021","","2020","","2019","","2018","","2017"],["Nonperforming Loans"],["Commercial real estate","$","30,924","","","$","87,951","","","$","22,427","","","$","11,085","","","$","2,501"],["Commercial and industrial","3,575","","","13,430","","","13,287","","","5,763","","","2,449"],["Commercial construction","384","","","384","","","737","","","11,780","","","1,460"],["Consumer real estate","9,476","","","15,624","","","8,658","","","6,262","","","6,316"],["Other consumer","158","","","96","","","36","","","33","","","62"],["Total Nonperforming Loans","44,517","","","117,485","","","45,145","","","34,923","","","12,788"],["Nonperforming Troubled Debt Restructurings"],["Commercial real estate","1,968","","","17,062","","","6,713","","","967","","","646"],["Commercial and industrial","16,235","","","9,907","","","695","","","3,197","","","4,493"],["Commercial construction","2,087","","","\u2014","","","\u2014","","","2,413","","","430"],["Consumer real estate","1,484","","","2,320","","","1,500","","","4,564","","","6,022"],["Other consumer","\u2014","","","\u2014","","","4","","","9","","","7"],["Total Nonperforming Troubled Debt Restructurings","21,774","","","29,289","","","8,912","","","11,150","","","11,598"],["Total Nonperforming Loans","66,291","","","146,774","","","54,057","","","46,073","","","24,386"],["OREO","13,313","","","2,155","","","3,525","","","3,092","","","469"],["Total Nonperforming Assets","$","79,604","","","$","148,929","","","$","57,582","","","$","49,165","","","$","24,855"],["Nonperforming loans as a percent of total loans","0.95","%","","2.03","%","","0.76","%","","0.77","%","","0.42","%"],["Nonperforming assets as a percent of total loans plus OREO","1.13","%","","2.06","%","","0.81","%","","0.83","%","","0.42","%"]]
[[/GREPCENT_TABLE]]

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due.

Nonperforming loans decreased $80.5 million to $66.3 million at December 31, 2021 compared to $146.8 million at December 31, 2020. The significant decrease in nonperforming loans primarily related to the return to performing status of $34.0 million of hotel loans, payoff of three CRE relationships for $14.4 million, charge-offs of four commercial relationships for $19.9 million and two loans moving to OREO for $12.2 million. Offsetting the decrease in nonperforming loans was the

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addition of a $21.7 million C&I relationship that had a $10.3 million charge-off in 2021 and a $1.8 million specific reserve at December 31, 2021 based on an estimated enterprise value of the company.

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, 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.

TDRs decreased $15.0 million to $31.7 million at December 31, 2021 compared to $46.7 million at December 31, 2020. Total TDRs of $31.7 million at December 31, 2021 included $9.9 million, or 31.2 percent, that were performing and $21.8 million, or 68.8 percent, that were not performing. This is a decrease from December 31, 2020 when we had $46.7 million in TDRs, including $17.4 million that were performing and $29.3 million that were nonperforming. The decrease in nonperforming TDRs during 2021 primarily related to a $6.1 million CRE loan that moved to OREO in the third quarter of 2021, a $4.6 million charge-off of a C&I loan and a $4.8 million payoff of a CRE loan. Offsetting this decrease was the addition of the $21.7 million C&I relationship discussed above that moved to TDR during the three months ended December 31, 2021. The modification was classified a TDR as it resulted in a payment delay at a non-market rate of interest. The decrease in performing TDRs during 2021 was attributed to payoffs of a $3.7 million CRE loan and a $2.5 million C&I loan.

Loan modifications resulting in new TDRs during 2021 included 40 modifications for $17.6 million compared to 40 modifications for $22.7 million of new TDRs in 2020. Included in the 2021 new TDRs were 25 loans totaling $1.1 million related to consumer bankruptcy filings that were not reaffirmed, thus resulting in discharged debt, which compares to 23 loans totaling $1.0 million in 2020.

The following represents delinquency as of December 31:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019","","2018","","2017"],["(dollars in thousands)","Amount","% of Loans","","Amount","% of Loans","","Amount","% of Loans","","Amount","% of Loans","","Amount","% of Loans"],["90 days or more:"],["Commercial real estate","$","32,892","","1.02","%","","$","105,014","","3.24","%","","$","29,140","","0.85","%","","$","12,052","","0.41","%","","$","3,468","","0.13","%"],["Commercial and industrial","19,810","","1.15","%","","23,337","","1.19","%","","13,982","","0.81","%","","8,960","","0.60","%","","5,646","","0.39","%"],["Commercial construction","2,471","","0.56","%","","384","","0.08","%","","737","","0.20","%","","14,193","","5.52","%","","3,873","","1.01","%"],["Consumer real estate","10,960","","0.74","%","","17,943","","1.22","%","","10,158","","0.66","%","","10,826","","0.90","%","","10,880","","0.91","%"],["Other consumer","158","","0.15","%","","96","","0.12","%","","40","","0.05","%","","42","","0.06","%","","71","","0.11","%"],["Total Loans","$","66,291","","0.95","%","","$","146,774","","2.03","%","","$","54,057","","0.76","%","","$","46,073","","0.77","%","","$","23,938","","0.42","%"],["30 to 89 days:"],["Commercial real estate","$","\u2014","","\u2014","%","","$","415","","0.01","%","","$","10,311","","0.28","%","","$","5,783","","0.20","%","","$","1,131","","0.04","%"],["Commercial and industrial","1,711","","0.10","%","","1,161","","0.04","%","","4,886","","0.17","%","","1,983","","0.13","%","","866","","0.06","%"],["Commercial construction","502","","0.11","%","","3,641","","0.01","%","","2,119","","0.25","%","","\u2014","","\u2014","%","","2,493","","0.65","%"],["Consumer real estate","3,287","","0.22","%","","3,430","","0.24","%","","5,943","","0.39","%","","4,816","","0.40","%","","7,069","","0.60","%"],["Other consumer","256","","0.24","%","","205","","0.21","%","","718","","0.54","%","","223","","0.33","%","","363","","0.54","%"],["Loans held for sale","\u2014","","\u2014","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%","","\u2014","","\u2014","%"],["Total Loans","$","5,757","","0.08","%","","$","8,852","","0.12","%","","$","23,977","","0.34","%","","$","12,805","","0.22","%","","$","11,922","","0.21","%"]]
[[/GREPCENT_TABLE]]

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Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments. Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more. We monitor delinquency on a monthly basis, including early-stage delinquencies of 30 to 89 days past due for early identification of potential problem loans. Loans past due 90 days or more decreased $80.5 million compared to December 31, 2020 and represented 0.95 percent of total loans at December 31, 2021. The change in loans past due 90 days or more is explained above in nonperforming assets discussion under Credit Quality. Loans past due by 30 to 89 days decreased $3.1 million and represented 0.08 percent of total loans at December 31, 2021.

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.

The following summarizes our loan charge-off experience for each of the four years presented below:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(dollars in thousands)","2021","","2020","","2019(1)","","2018(1)"],["ACL Balance at Beginning of Year:","$","117,612","","","$","62,224","","","$","60,996","","","$","56,390"],["Charge-offs:"],["Commercial real estate","(13,493)","","","(27,512)","","","(3,664)","","","(372)"],["Commercial and industrial","(22,305)","","","(75,408)","","","(8,928)","","","(8,574)"],["Commercial construction","(55)","","","(454)","","","(406)","","","(2,630)"],["Consumer real estate","(719)","","","(1,101)","","","(1,353)","","","(1,319)"],["Other consumer","(952)","","","(1,890)","","","(1,838)","","","(1,694)"],["Total","(37,524)","","","(106,365)","","","(16,189)","","","(14,589)"],["Recoveries:"],["Commercial real estate","1,196","","","348","","","137","","","309"],["Commercial and industrial","822","","","1,733","","","1,388","","","1,723"],["Commercial construction","14","","","183","","","5","","","1,135"],["Consumer real estate","310","","","233","","","637","","","541"],["Other consumer","652","","","489","","","377","","","492"],["Total","2,994","","","2,986","","","2,544","","","4,200"],["Net Charge-offs","(34,530)","","","(103,379)","","","(13,645)","","","(10,389)"],["Impact of CECL adoption","\u2014","","","27,346","","","\u2014","","","\u2014"],["Provision for credit losses","15,494","","","131,421","","","14,873","","","14,995"],["ACL Balance at End of Year:","$","98,576","","","$","117,612","","","$","62,224","","","$","60,996"]]
[[/GREPCENT_TABLE]]

(1)Represents ALL for year presented

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Net loan charge-offs for 2021 were $34.5 million, or 0.49 percent of average loans, compared to $103.4 million, or 1.41 percent of average loans for 2020. Excluding the customer fraud, net loan charge-offs were $44.7 million, or 0.61 percent of average loans for 2020. There were two significant charge-offs during 2021. The first was a $10.3 million charge-off for a C&I relationship based on an estimated enterprise value of the company. The second charge-off of $9.5 million was for a C&I relationship during 2021 due to updated financial information that evidenced a decrease in the collateral value.In addition to the above, other significant charge-offs during 2021 included two CRE relationships totaling $9.2 million. The charge-offs were due to market deterioration in the collateral values.

The following table summarizes net charge-offs as a percentage of average loans for the years presented:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019","","2018","","2017"],["Commercial real estate","0.38","%","","0.81","%","","0.10","%","","NM","","0.06","%"],["Commercial and industrial","1.17","%","","3.65","%","","0.44","%","","0.48","%","","0.28","%"],["Commercial construction","0.01","%","","0.06","%","","0.11","%","","0.48","%","","0.40","%"],["Consumer real estate","0.03","%","","0.06","%","","0.05","%","","0.07","%","","0.16","%"],["Other consumer","0.33","%","","1.75","%","","1.85","%","","1.79","%","","1.54","%"],["Net charge-offs to average loans outstanding","0.49","%","","1.40","%","","0.22","%","","0.18","%","","0.18","%"],["Allowance for credit losses as a percentage of total portfolio loans","1.41","%","","1.63","%","","0.87","%","","1.03","%","","0.98","%"],["Allowance for credit losses as a percentage of total portfolio loans excluding PPP","1.43","%","","1.74","%","","\u2014","%","","\u2014","%","","\u2014","%"],["Allowance for credit losses to total nonperforming loans","149","%","","80","%","","115","%","","132","%","","236","%"],["Provision for credit losses as a percentage of net loan charge-offs","45","%","","127","%","","109","%","","144","%","","135","%"]]
[[/GREPCENT_TABLE]]

NM - percentage not meaningful

The following is the ACL balance by portfolio segment as of December 31:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019","","2018","","2017"],["(dollars in thousands)","Amount","","% of Total","","Amount","","% of Total","","Amount","","% of Total","","Amount","","% of Total","","Amount","","% of Total"],["Commercial real estate","$","50,700","","","51.4","%","","$","65,656","","","55.8","%","","$","30,577","","","49.1","%","","$","33,707","","","55.3","%","","$","27,235","","","48.3","%"],["Commercial and industrial","19,727","","","20.0","%","","16,100","","","13.7","%","","15,681","","","25.2","%","","11,596","","","19.0","%","","8,966","","","15.9","%"],["Commercial construction","5,355","","","5.4","%","","7,239","","","6.2","%","","7,900","","","12.7","%","","7,983","","","13.1","%","","13,167","","","23.4","%"],["Business banking","11,338","","","11.5","%","","15,917","","","13.5","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Consumer real estate","8,733","","","8.9","%","","10,014","","","8.5","%","","6,337","","","10.2","%","","6,187","","","10.1","%","","5,479","","","9.7","%"],["Other consumer","2,723","","","2.8","%","","2,686","","","2.3","%","","1,729","","","2.8","%","","1,523","","","2.5","%","","1,543","","","2.7","%"],["Total","$","98,576","","","100.0","%","","$","117,612","","","100.0","%","","$","62,224","","","100.0","%","","$","60,996","","","100.0","%","","$","56,390","","","100.0","%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","2021","","2020","","2019","","2018","","2017"],["Collectively Evaluated","$","96,799","","","$","104,048","","","$","60,024","","","$","59,233","","","$","56,313"],["Individually Evaluated","1,777","","","13,564","","","2,200","","","1,763","","","77"],["Total Allowance for Credit Losses","$","98,576","","","$","117,612","","","$","62,224","","","$","60,996","","","$","56,390"]]
[[/GREPCENT_TABLE]]

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

The ACL was $98.6 million, or 1.41 percent of total portfolio loans, at December 31, 2021, compared to $117.6 million, or 1.63 percent of total portfolio loans, at December 31, 2020. The decrease in the ACL of $19.0 million was due to an $11.7 million decrease in specific reserves on loans individually evaluated and a $7.3 million decrease in loans collectively evaluated. The decrease in specific reserves was the result of approximately $7.8 million of loan charge-offs and the release of $5.7 million of specific reserve due to improved operating performance within our hotel portfolio. Offsetting this decrease in specific reserve was the addition of a $1.8 million specific reserve related to a $21.7 million C&I relationship that also had a $10.3 million charge-off in 2021 based on an estimated enterprise value of the company. The decrease in loans collectively evaluated of $7.3 million was due to improved economic conditions offset by additional segment allocations for our healthcare and C&I portfolios along with the increased uncertainty at year-end related to the Covid-19 Omicron variant.

Federal Home Loan Bank and Other Restricted Stock

At December 31, 2021 and 2020, we held FHLB of Pittsburgh stock of $8.5 million and $12.0 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, 2021. The FHLB exceeds all required capital ratios. Additionally, we considered that the FHLB has been paying dividends and actively redeeming stock throughout 2021 and 2020. Accordingly, we believe sufficient evidence exists to conclude that no impairment existed at December 31, 2021.

Deposits

The following table presents the composition of deposits at December 31:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","2021","","2020","","$ Change"],["Customer deposits"],["Noninterest-bearing demand","$","2,748,586","","","$","2,261,994","","","$","486,592"],["Interest-bearing demand","979,133","","","864,510","","","114,623"],["Money market","2,070,579","","","1,887,051","","","183,528"],["Savings","1,110,155","","","969,508","","","140,647"],["Certificates of deposit","1,083,071","","","1,369,239","","","(286,168)"],["Total customer deposits","7,991,524","","","7,352,302","","","639,222"],["Brokered deposits"],["Money market","\u2014","","","50,012","","","(50,012)"],["Certificates of deposit","5,000","","","18,224","","","(13,224)"],["Total brokered deposits","5,000","","","68,236","","","(63,236)"],["Total Deposits","$","7,996,524","","","$","7,420,538","","","$","575,986"]]
[[/GREPCENT_TABLE]]

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 increased $576.0 million, or 7.8 percent, at December 31, 2021 compared to December 31, 2020. Total customer deposits increased $639.2 million from December 31, 2020 primarily related to government stimulus programs, PPP loans and our customers' liquidity preferences. Total brokered deposits decreased $63.2 million from December 31, 2020 due to a reduced need for this funding given 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.

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The daily average balance of deposits and rates paid on deposits are summarized in the following table for the years ended December 31:

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["(dollars in thousands)","Amount","","Rate","","Amount","","Rate","","Amount","","Rate"],["Noninterest-bearing demand","$","2,594,152","","","\u2014","","","$","2,072,310","","","\u2014","","","$","1,475,960","","","\u2014"],["Interest-bearing demand","956,211","","","0.08","%","","844,331","","","0.19","%","","561,756","","","0.41","%"],["Money market","2,026,083","","","0.18","%","","1,960,741","","","0.57","%","","1,474,841","","","1.69","%"],["Savings","1,047,855","","","0.03","%","","899,717","","","0.11","%","","766,142","","","0.25","%"],["Certificates of deposit","1,246,499","","","0.46","%","","1,482,127","","","1.34","%","","1,322,643","","","1.91","%"],["Brokered deposits","16,419","","","1.15","%","","232,384","","","1.02","%","","370,779","","","2.32","%"],["Total","$","7,887,218","","","0.14","%","","$","7,491,610","","","0.48","%","","$","5,972,121","","","1.06","%"]]
[[/GREPCENT_TABLE]]

CDs of $250,000 and over accounted for 3.0 percent of total deposits at December 31, 2021 and 4.5 percent of total deposits at December 31, 2020 and primarily represent deposit relationships with local customers in our market area.

Maturities of CDs of $250,000 or more outstanding at December 31, 2021 are summarized as follows:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","2021"],["Three months or less","$","143,843"],["Over three through six months","45,989"],["Over six through twelve months","45,524"],["Over twelve months","8,045"],["Total","$","243,401"]]
[[/GREPCENT_TABLE]]

Borrowings

The following table represents the composition of borrowings for the years ended December 31:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","2021","","2020","","$ Change"],["Securities sold under repurchase agreements, retail","$","84,491","","","$","65,163","","","$","19,328"],["Short-term borrowings","\u2014","","","75,000","","","(75,000)"],["Long-term borrowings","22,430","","","23,681","","","(1,251)"],["Junior subordinated debt securities","54,393","","","64,083","","","(9,690)"],["Total Borrowings","$","161,314","","","$","227,928","","","$","(66,614)"]]
[[/GREPCENT_TABLE]]

Borrowings are an additional source of funding for us. Total borrowings decreased $66.6 million compared to December 31, 2020 due to increased customer deposits. Short-term borrowings decreased $75.0 million compared to December 31, 2020. At December 31, 2021, our long-term borrowings outstanding of $22.4 million included $19.3 million that were at a fixed rate and $3.1 million at a variable rate. Junior subordinated debt securities decreased $9.7 million compared to December 31, 2020 due to the repayment of a subordinated debt.

Information pertaining to short-term borrowings is summarized in the tables below:

[[GREPCENT_TABLE]]
[["","Securities Sold Under Repurchase Agreements"],["(dollars in thousands)","2021","","2020","","2019"],["Balance at December 31","$","84,491","","","$","65,163","","","$","19,888"],["Average balance during the year","$","69,964","","","$","57,673","","","$","16,863"],["Average interest rate during the year","0.11","%","","0.29","%","","0.65","%"],["Maximum month-end balance during the year","$","84,491","","","$","92,159","","","$","23,427"],["Average interest rate at December 31","0.10","%","","0.25","%","","0.74","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Short-Term Borrowings"],["(dollars in thousands)","2021","","2020","","2019"],["Balance at December 31","$","\u2014","","","$","75,000","","","$","281,319"],["Average balance during the year","$","6,301","","","$","155,753","","","$","255,264"],["Average interest rate during the year","0.19","%","","0.92","%","","2.51","%"],["Maximum month-end balance during the year","$","25,000","","","$","410,240","","","$","425,000"],["Average interest rate at December 31","\u2014","%","","0.19","%","","1.84","%"]]
[[/GREPCENT_TABLE]]

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Information pertaining to long-term borrowings is summarized in the tables below:

[[GREPCENT_TABLE]]
[["","Long-Term Borrowings"],["(dollars in thousands)","2021","","2020","","2019"],["Balance at December 31","$","22,430","","","$","23,681","","","$","50,868"],["Average balance during the year","22,995","","","47,953","","","$","66,392"],["Average interest rate during the year","1.99","%","","2.50","%","","2.76","%"],["Maximum month-end balance during the year","$","23,549","","","$","50,635","","","$","70,418"],["Average interest rate at December 31","1.94","%","","2.03","%","","2.61","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Junior Subordinated Debt Securities"],["(dollars in thousands)","2021","","2020","","2019"],["Balance at December 31","$","54,393","","","$","64,083","","","$","64,277"],["Average balance during the year","$","61,653","","","$","64,092","","","$","47,934"],["Average interest rate during the year","2.99","%","","3.57","%","","4.82","%"],["Maximum month-end balance during the year","$","64,128","","","$","64,848","","","$","64,277"],["Average interest rate at December 31","2.69","%","","3.01","%","","4.42","%"]]
[[/GREPCENT_TABLE]]

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. Financial Statements and Supplementary Data, of this Report, for more details.

Wealth Management Assets

As of December 31, 2021, 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 $2.3 billion from $2.1 billion as of December 31, 2020. Assets under administration consisted of $1.4 billion in S&T Trust, $0.8 billion in S&T Financial Services and $0.1 billion in Stewart Capital Advisors.

Liquidity and Capital Resources

Liquidity

Liquidity is defined as a financial institution’s ability to meet its cash and collateral obligations at a reasonable cost. Our primary future cash needs are centered on the ability to (i) satisfy the financial needs of depositors who may want to

withdraw funds or of borrowers needing to access funds to meet their credit needs and (ii) to meet our future cash commitments

under contractual obligations with third parties. In order to manage liquidity risk, our Board of Directors has delegated authority to ALCO for the formulation, implementation and oversight of liquidity risk management for S&T. The ALCO’s goal is to maintain adequate levels of liquidity at a reasonable cost to meet funding needs in both a normal operating environment and for potential liquidity stress events. The ALCO monitors and manages liquidity through various ratios, reviewing cash flow projections, performing stress tests and having a detailed contingency funding plan. The ALCO policy guidelines define graduated risk tolerance levels. If our liquidity position moves to a level that has been defined as high risk, specific actions are required, such as increased monitoring or the development of an action plan to reduce the risk position.

Our primary funding and liquidity source is a stable customer deposit base. We believe S&T has the ability to retain existing and attract new deposits, mitigating any funding dependency on other more volatile sources. Our deposits grew significantly during 2021 and we ended the year in a strong liquidity position. 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.

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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. We believe that these funding sources will provide adequate resources to fund our short-term and long-term operating and financing needs. In addition, our ability to access capital markets provides additional sources of funding with respect to strategic investing opportunities. Our access to and the availability of funds in the future will be affected by many factors, including, but not limited to our financial condition and prospects, our credit rating, the liquidity of the overall capital markets and the current state of the economy.

The following table summarizes our material contractual obligations as of December 31, 2021:

[[GREPCENT_TABLE]]
[["","Payments Due In"],["(dollars in thousands)","2022","","2023-2024","","2025-2026","","Later Years","","Total"],["Certificates of deposit(1)","$","961,578","","","$","62,334","","","$","60,820","","","$","3,339","","","$","1,088,071"],["Securities sold under repurchase agreements(1)","84,491","","","\u2014","","","\u2014","","","\u2014","","","$","84,491"],["Junior subordinated debt securities(1)","\u2014","","","\u2014","","","\u2014","","","54,393","","","$","54,393"],["Operating and capital leases","4,932","","","9,290","","","9,383","","","65,052","","","$","88,657"],["Purchase obligations","19,823","","","42,432","","","46,492","","","\u2014","","","$","108,747"]]
[[/GREPCENT_TABLE]]

(1)Excludes interest

Excluded from the table are deposits with no stated maturity of $6,908,453 as of December 31, 2021, a contractual obligation that we consider when assessing our liquidity, particularly in the context of a liquidity stress event as discussed below.

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, 2021, we had $1.3 billion in highly liquid assets, which consisted of $856.7 million in interest-bearing deposits with banks, $442.8 million in unpledged securities and $1.5 million in loans held for sale. This resulted in a highly liquid assets to total assets ratio of 13.7 percent at December 31, 2021. Also, at December 31, 2021, 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. Financial Statements and Supplementary Data, and the Borrowings section of this MD&A, for more details.

Capital Resources

Shareholders’ equity increased $51.7 million, or 4.5 percent, to $1.2 billion at December 31, 2021 compared to $1.2 billion at December 31, 2020. The increase was primarily due to net income of $110.3 million partially offset by dividends of $44.3 million and a $16.1 million decrease in other comprehensive income. The decrease in other comprehensive income was due to a $18.9 million decrease in unrealized gains on our available-for-sale securities, net of tax, which was partially offset by 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 9.74 percent as compared to the regulatory guideline of 5.00 percent to be well-capitalized and a risk-based Common Equity Tier 1 ratio of 12.03 percent compared to the regulatory guideline of 6.50 percent to be well-capitalized. Our risk-based Tier 1 and Total capital ratios were 12.43 percent and 13.79 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 and the minimum leverage and risk-based capital requirements of the Dodd-Frank Act. The rule requires a banking organization to maintain a capital conservation buffer composed of common equity tier 1 capital in an amount greater than 2.50 percent of total risk-weighted assets. Banking organizations must maintain a common equity tier 1 risk-based capital ratio greater than 7.00 percent, a tier 1 risk-based capital ratio greater than 8.50 percent and a total risk-based capital ratio greater than 10.50 percent; otherwise, it will be subject to restrictions on capital distributions and discretionary bonus payments. The minimum capital requirements plus the capital

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conservation buffer exceeds the regulatory capital ratios required for an insured depository institution to be well-capitalized under the FDIC's prompt corrective action framework.

Federal regulators periodically propose amendments to the regulatory capital rules and the related regulatory framework and consider changes to the capital standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form and effect of any such proposed amendments cannot be predicted.

We have filed a shelf registration statement on Form S-3 under the Securities Act of 1933 as amended, with the SEC, which allows for the issuance of a variety of securities including debt and capital securities, preferred and common stock and warrants. We may use the proceeds from the sale of securities for general corporate purposes, which could include investments at the holding company level, investing in, or extending credit to subsidiaries, possible acquisitions and stock repurchases. As of December 31, 2021, we had not issued any securities pursuant to the shelf registration statement.

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Inflation

Management is aware of the significant effect inflation has on interest rates and can have on financial performance and is closely monitoring the increased inflation rates being experienced in the economy. Our ability to cope with this is best determined by analyzing our capability to respond to changing interest rates and our ability to manage noninterest income and expense. We monitor the mix of interest-rate sensitive assets and liabilities through ALCO in order to reduce the impact of inflation on net interest income. We also control the effects of inflation by reviewing the prices of our products and services, by introducing new products and services and by controlling overhead expenses.

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