UNIVEST FINANCIAL CORPORATION (All dollar amounts presented in tables are in thousands, except per share data. "BP" equates to "basis points"; "NM" equates to "not meaningful"; "-" equates to "zero" or "doesn't round to a reportable number"; and "N/A" equates to "not applicable." Certain prior period amounts have been reclassified to conform to the current-year presentation.)
Forward-Looking Statements
The information contained in this report may contain forward-looking statements. When used or incorporated by reference in disclosure documents, the words "believe" "anticipate," "estimate," "expect," "project," "target," "goal" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may include but are not limited to: statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits. These forward-looking statements are based on current beliefs and expectations of our management and are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to certain risks, uncertainties and assumptions, including but not limited to those set forth below: •Operating, legal and regulatory risks; •Economic, political and competitive forces; •Legislative, regulatory and accounting changes; •Demand for our financial products and services in our market area; •Major catastrophes such as earthquakes, floods or other natural or human disasters and infectious disease outbreaks, including the current coronavirus (COVID-19) pandemic, the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on us and our customers and other constituencies; •Volatility in interest rates; •Fluctuations in real estate values in our market area; •The composition and credit quality of our loan and investment portfolios; •Changes in the level and direction of loan delinquencies, classified and criticized loans and charge-offs and changes in estimates of the adequacy of the allowance for credit losses; •Economic assumptions utilized to calculate the allowance for credit losses; •Our ability to access cost-effective funding; •Our ability to continue to implement our business strategies; •Our ability to manage market risk, credit risk and operational risk; •Timing of revenue and expenditures; •Adverse changes in the securities markets; •Our ability to enter new markets successfully and capitalize on growth opportunities; •Competition for loans, deposits and employees; •System failures or cyber-security breaches of our information technology infrastructure and those of our third-party service providers; •The failure to maintain current technologies and to successfully implement future information technology enhancements; •Our ability to retain key employees; •Other risks and uncertainties, including those occurring in theU.S. and world financial systems; and •The risk that our analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful. Given the ongoing and dynamic nature of the COVID-19 pandemic, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and whether the continued reopening of businesses will result in a meaningful increase in economic activity. As a result of the COVID-19 pandemic and the related adverse local and 48 --------------------------------------------------------------------------------
national economic consequences, our forward-looking statements are also subject to the following risks, uncertainties and assumptions:
•Demand for our products and services may decline; •If the economy is unable to remain open, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase; •Collateral for loans, especially real estate, may decline in value; •Our allowance for credit losses may have to be increased if economic conditions worsen or if borrowers experience financial difficulties; •The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; •A material decrease in net income or a net loss over several quarters could result in the elimination of or a decrease in the rate of our quarterly cash dividend; •Our wealth management revenues may decline with continuing market turmoil; •Our cyber security risks are increased as the result of an increase in the number of employees working remotely; •FDIC premiums may increase if the agency experiences additional resolution costs; and •Litigation, regulatory enforcement risk and reputation risk regarding our participation in the Paycheck Protection Program and the risk that theSmall Business Administration may not fund some or all PPP loan guaranties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These and other risk factors are more fully described in this report and in theUnivest Financial Corporation Annual Report on Form 10-K for the year endedDecember 31, 2020 under the section entitled "Item 1A - Risk Factors," and from time to time in other filings made by the Corporation with theSEC . These forward-looking statements speak only at the date of the report. The Corporation expressly disclaims any obligation to publicly release any updates or revisions to reflect any change in the Corporation's expectations with regard to any change in events, conditions or circumstances on which any such statement is based. Critical Accounting Policies Management, in order to prepare the Corporation's financial statements in conformity withU.S. generally accepted accounting principles, is required to make estimates and assumptions that affect the amounts reported in the Corporation's financial statements. There are uncertainties inherent in making these estimates and assumptions. Certain critical accounting policies could materially affect the results of operations and financial position of the Corporation should changes in circumstances require a change in related estimates or assumptions. The Corporation has identified the fair value measurement of investment securities available-for-sale and the calculation of the allowance for credit losses on loans and leases as critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation's 2020 Annual Report on Form 10-K.
General
The Corporation is aPennsylvania corporation, organized in 1973 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956. The Corporation owns all of the capital stock ofUnivest Bank and Trust Co. The consolidated financial statements include the accounts of the Corporation, the Bank and its subsidiaries. The Bank is engaged in domestic banking services for individuals, businesses, municipalities and non-profit organizations. Through its wholly-owned subsidiaries, the Bank provides a variety of financial services throughout its markets of operation. The Bank is the parent company ofGirard Investment Services, LLC , a full-service registered introducing broker-dealer and a licensed insurance agency,Girard Advisory Services, LLC , a registered investment advisory firm, andGirard Pension Services, LLC , a registered investment advisor, which provides investment consulting and management services to municipal entities. The Bank is also the parent company ofUnivest Insurance, LLC , an independent insurance agency andUnivest Capital, Inc. , an equipment financing business. 49 -------------------------------------------------------------------------------- The Corporation earns revenue primarily from the margins and fees generated from lending and depository services as well as fee-based income from trust, insurance, mortgage banking and investment services. The Corporation seeks to achieve adequate and reliable earnings through business growth while maintaining adequate levels of capital and liquidity and limiting exposure to credit and interest rate risk. Executive Overview
The Corporation's consolidated net income, earnings per share and return on average assets and average equity were as follows:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
(Dollars in thousands, except
per share data) 2021 2020 Amount Percent 2021 2020 Amount Percent
Net income $ 20,911 $ 18,119 $ 2,792 15.4 % $ 74,389 $ 21,042 $ 53,347 253.5 %
Net income per share:
Basic $ 0.71 $ 0.62 $ 0.09 14.5 $ 2.53 $ 0.72 $ 1.81 251.4
Diluted 0.71 0.62 0.09 14.5 2.52 0.72 1.80 250.0
Return on average assets 1.24 % 1.15 % 9 BP 7.8 1.53 % 0.48 % 105 BP 218.8
Return on average equity 11.12 % 10.89 % 23 BP 2.1 13.72 % 4.22 % 950 BP 225.5
The Corporation reported net income of $20.9 million , or $0.71 diluted earnings
per share, for the three months ended September 30, 2021 , compared to net income
of $18.1 million , or $0.62 diluted earnings per share, for the three months
ended September 30, 2020 . Net income for the nine months ended September 30,
2021 was $74.4 million , or $2.52 diluted earnings per share, compared to net
income of $21.0 million , or $0.72 diluted earnings per share, for the nine
months ended September 30, 2020 .
As of September 30, 2021 , $85.6 million in PPP loan originations remained
outstanding. During the third quarter of 2021, we recorded income of $4.2
million within net interest income related to these loans, of which $3.7 million
was the result of recognition of associated net deferred loan fees upon
forgiveness and pay downs of PPP loans totaling $171.4 million . During the nine
months ended September 30, 2021 , we recorded income of $13.5 million within net
interest income related to these loans, of which $8.6 million was the result of
recognition of associated net deferred loan fees upon forgiveness and pay downs
of PPP loans totaling $575.3 million . As of September 30, 2021 , the Corporation
had $2.4 million of net deferred fees on the balance sheet related to PPP loans,
which represented approximately 13.2% of the initial deferred fee amount.
Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on loans and leases and investment securities and interest paid on deposits and borrowings. Net interest income is the principal source of the Corporation's revenue. Table 1 presents the Corporation's average balances, tax-equivalent interest income, interest expense, tax-equivalent yields earned on average assets, cost of average liabilities, and shareholders' equity on a tax-equivalent basis for the three and nine months endedSeptember 30, 2021 and 2020. The tax-equivalent net interest margin is tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread represents the weighted average tax-equivalent yield on interest-earning assets less the weighted average cost of interest-bearing liabilities. The effect of net interest-free funding sources represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders' equity. Table 2 analyzes the changes in the tax-equivalent net interest income for the periods broken down by their rate and volume components.
Three and nine months ended
Net interest income on a tax-equivalent basis for the three months endedSeptember 30, 2021 was$49.2 million , an increase of$4.8 million , or 10.7%, compared to$44.5 million for the three months endedSeptember 30, 2020 . Net interest income on a tax-equivalent basis for the nine months endedSeptember 30, 2021 was$142.5 million , an increase of$10.7 million , or 8.1%, compared to the same period in 2020. The increase in tax-equivalent net interest income for the three months endedSeptember 30, 2021 compared to the comparable period in the prior year was primarily due to an increase in PPP loan income of$1.4 million , a$1.9 million decrease in the cost of interest-bearing liabilities and growth in loans partially offset by a 50 -------------------------------------------------------------------------------- decrease in loan, excluding PPP, and investment yields. The increase in tax-equivalent net interest income for the nine months endedSeptember 30, 2021 compared to the comparable period in the prior year was primarily due to an increase in PPP loan income of$8.5 million , a$6.2 million decrease in the cost of interest-bearing liabilities and growth in loans partially offset by a decrease in loans and investment yields. The net interest margin, on a tax-equivalent basis, was 3.11% and 3.13% for the three and nine months endedSeptember 30, 2021 , respectively, compared to 3.02% and 3.21% for the three and nine months endedSeptember 30, 2020 , respectively. Excess liquidity reduced the net interest margin by approximately 27 and 16 basis points for the three and nine months endedSeptember 30, 2021 , respectively, compared to 18 and 14 basis points for the three and nine months endedSeptember 30, 2020 , respectively. This excess liquidity was primarily driven by strong growth of deposit balances since the beginning of the COVID-19 pandemic, primarily due to the various pandemic-related stimulus initiatives. PPP loans had a favorable impact on net interest margin of 20 and 12 basis points for the three and nine months endedSeptember 30, 2021 , respectively, compared to an unfavorable impact of ten and seven basis points for the three and nine months endedSeptember 30, 2020 , respectively. As PPP loans are forgiven, the associated deferred fees are recognized in earnings, which occurred with greater frequency in 2021 as compared to 2020. Excluding the impact of excess liquidity and PPP loans, the net interest margin, on a tax-equivalent basis, was 3.18% and 3.17% for the three and nine months endedSeptember 30, 2021 , respectively, compared to 3.30% and 3.42% for the three and nine months endedSeptember 30, 2020 , respectively. 51 --------------------------------------------------------------------------------
Table 1-Average Balances and Interest Rates-Tax-Equivalent Basis
Three Months Ended September 30,
2021 2020
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets:
Interest-earning deposits with other banks
0.14 %$ 368,181 $ 100 0.11 % U.S. government obligations 6,999 36 2.04 6,998 36 2.05 Obligations of states and political subdivisions 2,992 24 3.18 18,004 167
3.69
Other debt and equity securities 385,289 1,516 1.56 360,219 1,610
1.78
Federal Home Loan Bank ,Federal Reserve Bank and other stock 26,713 334 4.96 28,651 419
5.82
Total interest-earning deposits, investments and other interest-earning assets 952,184 2,099 0.87 782,053 2,332
1.19
Commercial, financial and agricultural loans 880,986 7,412 3.34 807,376 7,330
3.61
Paycheck Protection Program loans 162,611 4,162 10.15 500,549 2,811
2.23
Real estate-commercial and construction loans 2,784,398 25,634 3.65 2,358,971 23,547 3.97 Real estate-residential loans 1,100,799 10,171 3.67 1,009,407 10,380 4.09 Loans to individuals 26,048 253 3.85 28,663 309 4.29 Municipal loans and leases 247,603 2,504 4.01 267,364 2,839 4.22 Lease financings 117,966 1,856 6.24 97,707 1,662 6.77 Gross loans and leases 5,320,411 51,992 3.88 5,070,037 48,878 3.84 Total interest-earning assets 6,272,595 54,091 3.42 5,852,090 51,210 3.48 Cash and due from banks 59,642 56,715 Allowance for credit losses, loans and leases (72,606) (87,046) Premises and equipment, net 55,685 55,755 Operating lease right-of-use assets 31,998 33,875 Other assets 350,863 354,216 Total assets$ 6,698,177 $ 6,265,605 Liabilities: Interest-bearing checking deposits$ 857,098 $ 537 0.25$ 725,580 $ 468 0.26 Money market savings 1,382,832 922 0.26 1,116,628 897 0.32 Regular savings 998,568 281 0.11 901,716 449 0.20 Time deposits 496,702 1,490 1.19 525,656 2,214 1.68 Total time and interest-bearing deposits 3,735,200 3,230 0.34 3,269,580 4,028 0.49 Short-term borrowings 15,116 2 0.05 130,359 97 0.30 Long-term debt 95,000 324 1.35 208,776 742 1.41 Subordinated notes 98,754 1,328 5.34 155,945 1,891 4.82 Total borrowings 208,870 1,654 3.14 495,080 2,730 2.19 Total interest-bearing liabilities 3,944,070 4,884 0.49 3,764,660 6,758 0.71 Noninterest-bearing deposits 1,931,525 1,760,818 Operating lease liabilities 35,094 37,170 Accrued expenses and other liabilities 41,303 41,010 Total liabilities 5,951,992 5,603,658 Shareholders' Equity: Common stock 157,784 157,784 Additional paid-in capital 297,482 296,272 Retained earnings and other equity 290,919 207,891 Total shareholders' equity 746,185 661,947 Total liabilities and shareholders' equity$ 6,698,177 $ 6,265,605 Net interest income$ 49,207 $ 44,452 Net interest spread 2.93 2.77 Effect of net interest-free funding sources 0.18 0.25 Net interest margin 3.11 % 3.02 % Ratio of average interest-earning assets to average interest-bearing liabilities 159.04 % 155.45 % Notes: For rate calculation purposes, average loan and lease categories include deferred fees and costs and purchase accounting adjustments. Nonaccrual loans and leases have been included in the average loan and lease balances. Loans held for sale have been included in the average loan balances. Tax-equivalent amounts for the three months endedSeptember 30, 2021 and 2020 have been calculated using the Corporation's federal applicable rate of 21%. 52 -------------------------------------------------------------------------------- Nine Months Ended September 30, 2021 2020 Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets:
Interest-earning deposits with other banks
0.12 % $ 267,023 $ 492 0.25 %
U.S. government obligations 6,999 107 2.04 7,176 109 2.03
Obligations of states and political
subdivisions 6,838 187 3.66 26,019 696 3.57
Other debt and equity securities 371,355 4,147 1.49 379,729 6,460
2.27
Federal Home Loan Bank ,Federal Reserve Bank and other stock 26,319 1,042 5.29 29,689 1,308
5.88
Total interest-earning deposits, investments and other interest-earning assets 740,279 5,774 1.04 709,636 9,065
1.71
Commercial, financial and agricultural loans 830,248 21,120 3.40 815,178 23,291
3.82
Paycheck Protection Program loans 358,231 13,464 5.03 291,173 4,939
2.27
Real estate-commercial and construction loans 2,703,100 75,023 3.71 2,244,143 70,574 4.20 Real estate-residential loans 1,067,855 29,880 3.74 1,001,904 31,702 4.23 Loans to individuals 25,925 769 3.97 29,251 1,043 4.76 Municipal loans and leases 248,191 7,632 4.11 291,845 9,081 4.16 Lease financings 111,569 5,412 6.49 92,780 4,808 6.92 Gross loans and leases 5,345,119 153,300 3.83 4,766,274 145,438 4.08 Total interest-earning assets 6,085,398 159,074 3.49 5,475,910 154,503 3.77 Cash and due from banks 55,983 51,544 Allowance for credit losses, loans and leases (76,265) (66,977) Premises and equipment, net 55,803 55,967 Operating lease right-of-use assets 33,334 34,278 Other assets 355,323 342,196 Total assets$ 6,509,576 $ 5,892,918 Liabilities: Interest-bearing checking deposits$ 820,800 $ 1,514 0.25$ 642,935 $ 1,636 0.34 Money market savings 1,282,470 2,606 0.27 1,079,279 4,653 0.58 Regular savings 979,013 861 0.12 863,772 1,716 0.27 Time deposits 502,414 4,808 1.28 568,517 7,801 1.83 Total time and interest-bearing deposits 3,584,697 9,789 0.37 3,154,503 15,806 0.67 Short-term borrowings 17,363 7 0.05 110,689 325 0.39 Long-term debt 97,088 993 1.37 196,053 2,268 1.55 Subordinated notes 151,060 5,822 5.15 115,376 4,372 5.06 Total borrowings 265,511 6,822 3.44 422,118 6,965 2.20 Total interest-bearing liabilities 3,850,208 16,611 0.58 3,576,621 22,771 0.85 Noninterest-bearing deposits 1,854,648 1,571,629 Operating lease liabilities 36,636 37,538 Accrued expenses and other liabilities 43,023 41,691 Total liabilities 5,784,515 5,227,479 Shareholders' Equity: Common stock 157,784 157,784 Additional paid-in capital 296,744 295,759 Retained earnings and other equity 270,533 211,896 Total shareholders' equity 725,061 665,439 Total liabilities and shareholders' equity$ 6,509,576 $ 5,892,918 Net interest income$ 142,463 $ 131,732 Net interest spread 2.91 2.92 Effect of net interest-free funding sources 0.22 0.29 Net interest margin 3.13 % 3.21 % Ratio of average interest-earning assets to average interest-bearing liabilities 158.05 % 153.10 % Notes: For rate calculation purposes, average loan and lease categories include deferred fees and costs and purchase accounting adjustments. Nonaccrual loans and leases have been included in the average loan and lease balances. Loans held for sale have been included in the average loan balances. Tax-equivalent amounts for the nine months endedSeptember 30, 2021 and 2020 have been calculated using the Corporation's federal applicable rate of 21%. 53 --------------------------------------------------------------------------------
Table 2-Analysis of Changes in Net Interest Income
The rate-volume variance analysis set forth in the table below compares changes
in tax-equivalent net interest income for the periods indicated by their rate
and volume components. The change in interest income/expense due to both volume
and rate has been allocated proportionately.
Three Months Ended Nine Months Ended
September 30, 2021 Versus 2020 September 30, 2021 Versus 2020
Volume Rate Volume Rate
(Dollars in thousands) Change Change Total Change Change Total
Interest income:
Interest-earning deposits with other banks $ 55 $ 34 $ 89 $ 98 $ (299) $ (201)
U.S. government obligations - - - (3) 1 (2)
Obligations of states and political subdivisions (123) (20) (143) (526) 17 (509)
Other debt and equity securities 109 (203) (94) (139) (2,174)
(2,313)
Federal Home Loan Bank ,Federal Reserve Bank and other stock (26) (59) (85) (141) (125)
(266)
Interest on deposits, investments and other earning assets 15 (248) (233) (711) (2,580)
(3,291)
Commercial, financial and agricultural loans 648 (566) 82 425 (2,596)
(2,171)
Paycheck Protection Program loans (2,974) 4,325 1,351 1,357 7,168
8,525
Real estate-commercial and construction loans 4,068 (1,981)
2,087 13,312 (8,863) 4,449
Real estate-residential loans 902 (1,111) (209) 2,002 (3,824) (1,822) Loans to individuals (26) (30) (56) (111) (163) (274) Municipal loans and leases (200) (135) (335) (1,341) (108) (1,449) Lease financings 330 (136) 194 919 (315) 604 Interest and fees on loans and leases 2,748 366 3,114 16,563 (8,701) 7,862 Total interest income 2,763 118 2,881 15,852 (11,281) 4,571 Interest expense: Interest-bearing checking deposits 87 (18) 69 380 (502) (122) Money market savings 203 (178) 25 771 (2,818) (2,047) Regular savings 46 (214) (168) 210 (1,065) (855) Time deposits (116) (608) (724) (834) (2,159) (2,993) Total time and interest-bearing deposits 220 (1,018) (798) 527 (6,544) (6,017) Short-term borrowings (49) (46) (95) (156) (162) (318) Long-term debt (388) (30) (418) (1,036) (239) (1,275) Subordinated notes (751) 188 (563) 1,371 79 1,450 Interest on borrowings (1,188) 112 (1,076) 179 (322) (143) Total interest expense (968) (906) (1,874) 706 (6,866) (6,160) Net interest income$ 3,731 $ 1,024 $ 4,755 $ 15,146 $ (4,415) $ 10,731 54
--------------------------------------------------------------------------------
Provision for Credit Losses
The reversal of the provision for credit losses for the three months endedSeptember 30, 2021 was$182 thousand , of which$2.9 million (after-tax benefit of$2.3 million ) was attributable to favorable changes in economic-related assumptions within the Corporation's CECL model, partially offset by an increase in reserves for loan, unfunded commitments and investment securities. The provision for credit losses for the three months endedSeptember 30, 2020 was$3.9 million , of which$5.6 million was related to loans and leases,$163 thousand was a reversal of provision related to investment securities and$1.5 million was a reversal of provision related to unfunded commitments. Included within the$3.9 million in provision for credit losses was$280 thousand (after-tax charge of$221 thousand ), which was attributable to changes in economic-related assumptions within the Corporation's CECL model, which were predominately driven by COVID-19. The reversal of the provision for credit losses for the nine months endedSeptember 30, 2021 was$11.5 million , of which$18.7 million (after-tax benefit of$14.8 million ) was attributable to favorable changes in economic-related assumptions within the Corporation's CECL model, partially offset by an increase in reserves for loans, unfunded commitments and investment securities. The provision for credit losses for the nine months endedSeptember 30, 2020 was$49.5 million , of which$40.5 million (after-tax charge of$32.0 million ) was attributable to economic-related assumptions within the Corporation's CECL model.
Noninterest Income
The following table presents noninterest income for the three and nine months
ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
(Dollars in thousands) 2021 2020 Amount Percent 2021 2020 Amount Percent
Trust fee income 2,126 $ 1,915 $ 211 11.0 % $ 6,317 $ 5,729 $ 588 10.3 %
Service charges on deposit
accounts 1,422 1,187 235 19.8 4,018 3,474 544 15.7
Investment advisory commission
and fee income 4,796 4,005 791 19.8 14,051 11,800 2,251 19.1
Insurance commission and fee
income 3,837 3,776 61 1.6 12,631 12,575 56 0.4
Other service fee income 2,576 2,093 483 23.1 7,516 5,451 2,065 37.9
Bank owned life insurance
income 925 741 184 24.8 3,262 2,207 1,055 47.8
Net gain on sales of investment
securities 21 57 (36) (63.2) 140 817 (677) (82.9)
Net gain on mortgage banking
activities 3,224 5,860 (2,636) (45.0) 12,623 12,119 504 4.2
Other income 1,625 2,171 (546) (25.1) 3,474 4,017 (543) (13.5)
Total noninterest income
(5.7 %) $ 64,032 $ 58,189 $ 5,843 10.0 %
Three and nine months ended
Noninterest income for the three months endedSeptember 30, 2021 was$20.6 million , a decrease of$1.3 million , or 5.7%, from the three months endedSeptember 30, 2020 . Noninterest income for the nine months endedSeptember 30, 2021 was$64.0 million , an increase of$5.8 million , or 10.0%, from the nine months endedSeptember 30, 2020 . The net gain on mortgage banking activities decreased$2.6 million , or 45.0%, for the three months endedSeptember 30, 2021 but increased$504 thousand , or 4.2%, for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year. The decrease for the three months endedSeptember 30, 2021 was primarily due to a decrease in volume and a contraction of margins. Investment advisory commission and fee income increased$791 thousand , or 19.8%, for the three months endedSeptember 30, 2021 and$2.3 million , or 19.1%, for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year, due to increased assets under management driven by favorable market conditions and new customer relationships. BOLI income increased$184 thousand , or 24.8%, for the three months endedSeptember 30, 2021 and$1.1 million , or 47.8%, for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year, primarily due to tax-free proceeds from BOLI death benefit claims of$893 thousand and$196 thousand received in the second and third quarter of 2021, respectively. 55 -------------------------------------------------------------------------------- Other service fee income increased$483 thousand , or 23.1%, for the three months endedSeptember 30, 2021 and$2.1 million , or 37.9%, for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year. Interchange fee income increased$290 thousand for the three months endedSeptember 30, 2021 and$962 thousand for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year, due to increased customer activity. Mortgage servicing fees increased$163 thousand for the three months endedSeptember 30, 2021 and$855 thousand for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year, driven by an increase in retained servicing associated with elevated mortgage volume over the past eighteen months. Other income decreased$546 thousand , or 25.1%, for the three months endedSeptember 30, 2021 and$543 thousand , or 13.5%, for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year. Fees on risk participation agreements for interest rate swaps decreased$1.9 million and$2.3 million for the three and nine months endedSeptember 30, 2021 , respectively, from the comparable periods in the prior year driven by a decrease in customer demand. Gain on the sale of SBA loans increased$897 thousand and$922 thousand for the three and nine months endedSeptember 30, 2021 , respectively, from the comparable periods in the prior year. This increase was reflective of the Corporation's commitment to delivering comprehensive financial solutions to small businesses and the expansion of the SBA lending team during the first half of 2021. Net gains or losses related to valuations and sales of other real estate owned increased$297 thousand for the three and nine months endedSeptember 30, 2021 from the comparable periods in the prior year, primarily due to a$300 thousand valuation adjustment on other real estate owned during the third quarter of 2020. Other income increased$456 thousand for the nine months endedSeptember 30, 2021 primarily driven by a gain on the value of equity securities measured at fair value of$164 thousand compared to a loss of$321 thousand for the nine months endedSeptember 30, 2020 .
Noninterest Expense
The following table presents noninterest expense for the three and nine months
ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
(Dollars in thousands) 2021 2020 Amount Percent 2021 2020 Amount Percent
Salaries, benefits and
commissions 26,641 24,059 $ 2,582 10.7 % $ 76,817 $ 69,595 $ 7,222 10.4 %
Net occupancy 2,525 2,609 (84) (3.2) 7,920 7,661 259 3.4
Equipment 1,000 972 28 2.9 2,914 2,890 24 0.8Data processing 3,274 2,862 412 14.4 9,388 8,372 1,016 12.1 Professional fees 2,174 1,321 853 64.6 5,937 3,902 2,035 52.2 Marketing and advertising 539 463 76 16.4 1,380 1,400 (20) (1.4) Deposit insurance premiums 765 707 58 8.2 2,014 1,826 188 10.3 Intangible expenses 214 283 (69) (24.4) 712 934 (222) (23.8) Other expense 6,116 5,251 865 16.5 16,992 16,684 308 1.8
Total noninterest expense
12.3 % $ 124,074 $ 113,264 $ 10,810 9.5 %
Three and nine months ended
Noninterest expense for the three months endedSeptember 30, 2021 was$43.2 million , an increase of$4.7 million , or 12.3%, from the three months endedSeptember 30, 2020 . Noninterest expense for the nine months endedSeptember 30, 2021 was$124.1 million , an increase of$10.8 million , or 9.5%, from the nine months endedSeptember 30, 2020 . Salaries, benefits and commissions increased$2.6 million , or 10.7%, for the three months endedSeptember 30, 2021 and$7.2 million , or 10.4%, for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year. These increases reflect our continued investment in revenue producing staff across all business lines and annual merit increases. Additionally, variable incentive compensation expenses increased$829 thousand and$2.6 million for the three and nine months endedSeptember 30, 2021 , respectively, from the comparable periods in the prior year, due to increased profitability. Professional fees increased$853 thousand , or 64.6%, for the three months endedSeptember 30, 2021 and$2.0 million , or 52.2%, for the nine months endedSeptember 30, 2021 from the comparable periods in the prior year, primarily attributable to increased consultant fees in support of our Diversity, Equity and Inclusion program, training initiatives and treasury management product enhancements. Data processing expenses increased$412 thousand , or 14.4%, for the three months endedSeptember 30, 2021 and$1.0 million , or 12.1%, for the nine months endedSeptember 30, 2021 from the comparable periods in 56 -------------------------------------------------------------------------------- the prior year, primarily due to continued investments in our end-to-end loan origination solution for loans below$1.0 million , customer relationship management software, internal infrastructure improvements and outsourced data processing solutions. Other expense increased$865 thousand , or 16.5%, for the three months endedSeptember 30, 2021 from the comparable period in the prior year, due to increases in professional liability insurance, bank shares tax expense, interchange fee expense and travel and entertainment expenses, which are beginning to normalize as the markets we operate in continue to remain open.
Tax Provision
The Corporation recognized a tax expense of$5.3 million and$5.1 million for the three months endedSeptember 30, 2021 and 2020 resulting in an effective rate of 20.1% and 21.9%, respectively. The Corporation recognized a tax expense of$18.0 million and$4.2 million for the nine months endedSeptember 30, 2021 and 2020 resulting in an effective rate of 19.4% and 16.7%, respectively. The effective tax rates for the three and nine months endedSeptember 30, 2021 and 2020 reflects the level of pre-tax income and the benefits of tax-exempt income from investments in municipal securities and loans and leases. Additionally, the effective income tax rate for the nine months endedSeptember 30, 2021 was favorably impacted by discrete tax benefits and proceeds from BOLI death benefits. Financial Condition Assets
The following table presents assets at the dates indicated:
At September 30, At December 31, Change
(Dollars in thousands) 2021 2020 Amount Percent
Cash and cash equivalents $ 902,357 $ 219,858 $ 682,499 310.4 %
Investment securities, net of allowance
for credit losses 393,377 373,176 20,201 5.4
Federal Home Loan Bank , Federal Reserve
Bank and other stock, at cost 28,679 28,183 496 1.8
Loans held for sale 29,093 37,039 (7,946) (21.5)
Loans and leases held for investment 5,252,045 5,306,841 (54,796) (1.0)
Allowance for credit losses, loans and
leases (70,146) (83,044) 12,898 15.5
Premises and equipment, net 55,354 55,636 (282) (0.5)
Operating lease right-of-use assets 31,570 34,325 (2,755) (8.0)
Goodwill and other intangibles, net 181,918 181,425 493 0.3
Bank owned life insurance 117,981 117,718 263 0.2
Accrued interest receivable and other
assets 57,624 65,339 (7,715) (11.8)
Total assets $ 6,979,852 $ 6,336,496 $ 643,356 10.2 %
Cash and Interest-Earning Deposits
Cash and interest-earning deposits increased$682.5 million , or 310.4%, fromDecember 31, 2020 , primarily due to increased interest earning deposits at theFederal Reserve Bank of$675.2 million , which stems from excess cash on hand due to deposit growth.Investment Securities Total investment securities atSeptember 30, 2021 increased$20.2 million , or 5.4%, fromDecember 31, 2020 . Purchases of$122.8 million , increases in the fair value of available-for-sale investment securities of$1.4 million and a reversal of provision for credit losses of$54 thousand were partially offset by maturities and pay-downs of$81.1 million , calls of$11.1 million , sales of$10.0 million and net amortization of purchased premiums and discounts of$2.2 million . 57 --------------------------------------------------------------------------------
Loans and Leases
Gross loans and leases held for investment decreased$54.8 million , or 1.0%, fromDecember 31, 2020 . Gross loans and leases held for investment, excluding PPP loans, atSeptember 30, 2021 increased$343.4 million or 7.1% fromDecember 31, 2020 . The growth in gross loans and leases held for investment, excluding PPP loans, was primarily due to increases in commercial, construction, commercial real estate, and residential mortgage loans.
Asset Quality
The Bank's strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans and leases. Performance of the loan and lease portfolio is monitored on a regular basis by Bank management and lending officers. Nonaccrual loans and leases and accruing troubled debt restructured loans are loans or leases for which it is probable that not all principal and interest payments due will be collectible in accordance with the original contractual terms. Factors considered by management in determining accrual status include payment status, borrower cash flows, collateral value and the probability of collecting scheduled principal and interest payments when due. Nonperforming assets were$37.1 million atSeptember 30, 2021 and$40.5 million atDecember 31, 2020 . AtSeptember 30, 2021 nonaccrual loans and leases and accruing troubled debt restructured loans were$34.6 million and had a related allowance for credit losses on loans and leases of$15 thousand . AtDecember 31, 2020 , nonaccrual loans and leases and accruing troubled debt restructured loans were$31.7 million and had a related allowance for credit losses on loans and leases of$585 thousand . Individual reserves have been established based on current facts and management's judgements about the ultimate outcome of these credits, including the most recent known data available on any related underlying collateral and the borrower's cash flows. Net loan and lease recoveries for the three months endedSeptember 30, 2021 were$75 thousand compared to$35 thousand for the same period in the prior year. Net loan and lease charge-offs for the nine months endedSeptember 30, 2021 were$456 thousand compared to$4.0 million for the same period in the prior year. The nine months endedSeptember 30, 2020 included a$2.7 million charge-off related to a commercial real estate loan. Other real estate owned was$279 thousand and$7.4 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. The decrease of$7.1 million was related to the sale of a commercial real estate property in the second quarter of 2021 which was transferred to other real estate owned in the second quarter of 2020. 58 --------------------------------------------------------------------------------
Table 3-Nonaccrual and Past Due Loans and Leases; Troubled Debt Restructured Loans and Lease Modifications; Other Real Estate Owned; and Related Ratios
The following table details information pertaining to the Corporation's nonperforming assets at the dates indicated. (Dollars in thousands)
At Commercial, financial and agricultural $ 933 $ 2,827 Real estate-commercial 28,296 22,739 Real estate-residential 5,269 5,919 Lease financings 30 207
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*
34,528 31,692
Accruing troubled debt restructured loans and lease modifications not included in the above
51 53
Accruing loans and leases 90 days or more past due: Commercial, financial and agricultural
2,000 50 Real estate-commercial - 945 Loans to individuals 58 185 Lease financings 146 212 Total accruing loans and leases, 90 days or more past due 2,204 1,392 Total nonperforming loans and leases 36,783 33,137 Other real estate owned 279 7,355 Total nonperforming assets $ 37,062 $ 40,492
Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment
0.66 % 0.60 %
Nonperforming loans and leases / loans and leases held for investment
0.70 % 0.62 %
Nonperforming assets / total assets 0.53 % 0.64 %
Allowance for credit losses, loans and leases $ 70,146 $ 83,044
Allowance for credit losses, loans and leases / loans and leases held for investment
1.34 % 1.56 %
Allowance for credit losses, loans and leases / nonaccrual loans and leases held for investment
203.16 % 262.03 %
Allowance for credit losses, loans and leases / nonperforming loans and leases held for investment
190.70 % 250.61 %
* Nonaccrual troubled debt restructured loans and lease modifications included in nonaccrual loans and leases in the above table
$ 2,418 $ 14,069
The following table provides additional information on the Corporation's nonaccrual loans held for investment:
At September 30, At December 31,
(Dollars in thousands) 2021 2020
Total nonaccrual loans and leases, including nonaccrual
troubled debt restructured loans and lease modifications
$ 31,692 Nonaccrual loans and leases with partial charge-offs 3,118 4,227
Life-to-date partial charge-offs on nonaccrual loans and leases
2,269 2,377
Specific reserves on individually analyzed loans 15 585
The Corporation modified certain loans and leases via principal and/or interest
deferrals in accordance with Section 4013 of the CARES Act, the Consolidated
Appropriations Act, 2021 and the Interagency Statement on Loan Modifications and
Reporting for Financial Institutions Working with Customers Affected by the
Coronavirus and have not categorized these modifications as troubled debt
restructurings. As of September 30, 2021 , there were approximately 14 loan and
lease modifications outstanding with principal balances totaling $18.1 million .
As of December 31, 2020 , there were approximately 72 loan modifications
outstanding with principal balances totaling $68.0 million .
59
--------------------------------------------------------------------------------Table 4-Loan Concentration
The following table provides summarized detail related to outstanding commercial loan balances, excluding PPP loans, segmented by industry description, and certain loan modifications segmented by industry description for commercial loans and segmented by loan category for other loan types as ofSeptember 30, 2021 : (Dollars in thousands)
As of
$ Balance of Modified Loans as a %
Total Outstanding % of Commercial Loan Modified Loans of Portfolio (excl
Industry Description Balance (excl PPP) Portfolio (1) PPP) (1)
CRE - Retail $ 365,379 8.6 % $ - - %
Animal Production 291,723 6.8 - -
CRE - 1-4 Family Residential Investment 255,116 6.0 - -
CRE - Office 240,011 5.6 - -
CRE - Multi-family 206,667 4.8 - -
CRE - Industrial / Warehouse 180,421 4.2 - -
Nursing and Residential Care Facilities 171,482 4.0 - -
Hotels & Motels (Accommodation) 170,042 4.0 10,613 6.2 %
Education 156,395 3.7 - -
Specialty Trade Contractors 122,222 2.9 - -
CRE - Mixed-Use - Residential 120,873 2.8 - -
CRE - Medical Office 103,553 2.4 - -
Real Estate Lenders, Secondary Market
Financing 98,983 2.3 - -
Homebuilding (tract developers, remodelers) 92,782 2.2 - -
Merchant Wholesalers, Durable Goods 87,849 2.1 - -
Crop Production 75,439 1.8 - -
Private Equity & Special Purpose Entities 74,026 1.7 - -
Rental and Leasing Services 70,499 1.7 - -
Motor Vehicle and Parts Dealers 66,880 1.6 - -
Food Manufacturing 65,857 1.5 - -
Wood Product Manufacturing 64,403 1.5 - -
Fabricated Metal Product Manufacturing 60,991 1.4 - -
Merchant Wholesalers, Nondurable Goods 60,276 1.4 - -
Food Services and Drinking Places 57,794 1.3 - -
Administrative and Support Services 53,430 1.3 104 0.2
Miniwarehouse/Self-Storage 52,815 1.2 - -
Industries with >$50 million in outstandings $ 3,365,908 78.8 % $ 10,717 0.3 %
Industries with <$50 million in outstandings $ 903,880 21.2 % $ 6,878 0.8 %
Total Commercial Loans $ 4,269,788 100.0 % $ 17,595 0.4 %
$ Balance of Modified Loans as a %
Total Outstanding Modified Loans of Portfolio (excl
Consumer Loans and Lease Financings Balance (1) PPP) (1)
Real Estate-Residential Secured for Personal
Purpose $ 535,705 $ 337 0.1 %
Real Estate-Home Equity Secured for Personal
Purpose 159,029 - -
Loans to Individuals 26,458 15 0.1
Lease Financings 175,464 107 0.1
Total Consumer Loans and Lease Financings $ 896,656 $ 459 0.1 %
Total $ 5,166,444 $ 18,054 0.3 %
(1) Loan modifications referenced above were made in accordance with Section
4013 of the CARES Act, the Consolidated Appropriations Act, 2021 and the
Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus and therefore
were not classified as TDRs as of September 30, 2021 .
Goodwill and other intangible assets have been recorded on the books of the Corporation in connection with acquisitions. The Corporation has core deposit and customer-related intangibles and servicing rights, which are not deemed to have an indefinite life and therefore will continue to be amortized over their useful life using the present value of projected cash flows. The amortization of intangible assets was$892 thousand and$1.1 million for the three months endedSeptember 30, 2021 and 2020, respectively. The amortization of intangible assets was$2.9 million and$3.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. See Note 5 to the Condensed Unaudited Consolidated Financial Statements, "Goodwill and Other Intangible Assets," for a summary of intangible assets atSeptember 30, 2021 andDecember 31, 2020 . 60 -------------------------------------------------------------------------------- The Corporation also has goodwill with a net carrying value of$172.6 million atSeptember 30, 2021 andDecember 31, 2020 , which is deemed to be an indefinite intangible asset and is not amortized. The Corporation completes a goodwill impairment analysis on an annual basis, or more often if events and circumstances indicate that there may be impairment. The Corporation also completes an impairment test for other identifiable intangible assets on an annual basis or more often if events and circumstances indicate there may be impairment. There was no impairment of goodwill or identifiable intangibles during the nine months endedSeptember 30, 2021 and 2020. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Liabilities
The following table presents liabilities at the dates indicated:
At September 30, At December 31, Change
(Dollars in thousands) 2021 2020 Amount Percent
Deposits $ 5,938,154 $ 5,242,715 $ 695,439 13.3 %
Short-term borrowings 14,101 17,906 (3,805) (21.2)
Long-term debt 95,000 110,000 (15,000) (13.6)
Subordinated notes 98,797 183,515 (84,718) (46.2)
Operating lease liabilities 34,641 37,690 (3,049) (8.1)
Accrued interest payable and other
liabilities 43,136 52,198 (9,062) (17.4)
Total liabilities $ 6,223,829 $ 5,644,024 $ 579,805 10.3 %
Deposits
Total deposits increased
Borrowings
Total borrowings decreased$103.5 million , or 33.2%, fromDecember 31, 2020 , due to decreases in short-term borrowings of$3.8 million , a decrease in long-term debt of$15.0 million , primarily due to maturities of FHLB advances, and a decrease in subordinated notes of$84.7 million , primarily due to a$85.0 million redemption of the previously issued 2016 and 2015 subordinated notes during the year. Shareholders' Equity
The following table presents total shareholders' equity at the dates indicated:
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