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; •Inflation or 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; •Changes in the economic assumptions utilized to calculate the allowance for credit losses; •Our ability to access cost-effective funding; •Our ability to implement our business strategies; •Our ability to manage market risk, credit risk and operational risk; •Timing and amount of revenue and expenditures; •Adverse changes in the securities markets; •The anticipated impact of any military conflict, terrorist act or other geopolitical acts; •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/or 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. 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, 2021 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. 45 --------------------------------------------------------------------------------
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 2021 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. 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 Six Months Ended
June 30, Change June 30, Change
(Dollars in thousands, except
per share data) 2022 2021 Amount Percent 2022 2021 Amount Percent
Net income $ 13,166 $ 20,875 $ (7,709) (36.9) % $ 33,483 $ 53,478 $ (19,995) (37.4) %Net income per share: Basic$ 0.45 $ 0.71 $ (0.26) (36.6)$ 1.14 $ 1.82 $ (0.68) (37.4) Diluted 0.45 0.71 (0.26) (36.6) 1.13 1.81 (0.68) (37.6) Return on average assets 0.76 % 1.30 % (54 BP) (41.5) 0.96 % 1.68 % (72 BP) (42.9) Return on average equity 6.85 % 11.49 % (464 BP) (40.4) 8.74 % 15.10 % (636 BP) (42.1) The Corporation reported net income of$13.2 million , or$0.45 diluted earnings per share, for the three months endedJune 30, 2022 , compared to net income of$20.9 million , or$0.71 diluted earnings per share, for the three months endedJune 30, 2021 . Net income for the six months endedJune 30, 2022 was$33.5 million , or$1.13 diluted earnings per share, compared to net income of$53.5 million , or$1.81 diluted earnings per share, for the six months endedJune 30, 2021 . During the three months endedJune 30, 2022 , the Corporation recorded a provision for credit losses of$6.7 million primarily driven by a$5.5 million increase (after-tax charge of$4.3 million ), or$0.15 diluted earnings per share, in reserves due to loan growth, a specific reserve of$1.1 million related to a commercial real estate loan that was placed on nonaccrual status during the quarter and an incremental provision of$736 thousand related to an existing nonaccrual commercial real-estate loan. During the three months endedJune 30, 2021 , the Corporation recorded a reversal of provision for credit losses of$59 thousand driven by a$2.7 million increase (after-tax charge of$2.1 million ), or$0.07 diluted earnings per share, in reserves due to loan growth outpaced by favorable changes in economic-related assumptions within the Corporation's CECL model. 46 -------------------------------------------------------------------------------- During the six months endedJune 30, 2022 , the Corporation recorded a provision for credit losses of$3.2 million primarily driven by a$6.8 million increase (after-tax charge of$5.4 million ), or$0.18 diluted earnings per share, in reserves due to loan growth and specific reserves of$2.8 million on two nonaccrual commercial real estate properties. These increases were partially offset by$7.3 million (after-tax benefit of$5.8 million ), or$0.19 diluted earnings per share, of changes in economic-related assumptions within the Corporation's CECL model. Additionally, reserves on unfunded commitments and investment securities increased$990 thousand during the six months endedJune 30, 2022 . During the six months endedJune 30, 2021 , the Corporation recorded a reversal of provision for credit losses of$11.3 million , of which$15.8 million (after-tax benefit of$12.5 million ), or$0.42 diluted earnings per share, was attributable to favorable changes in economic-related assumptions within the Corporation's CECL model, partially offset by a reserve increase attributable to loan growth. 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 six months endedJune 30, 2022 and 2021. 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 six months ended
Net interest income on a tax-equivalent basis for the three months endedJune 30, 2022 was$52.0 million , an increase of$4.7 million , or 9.9%, compared to$47.3 million for the three months endedJune 30, 2021 . The increase in tax-equivalent net interest income for the three months endedJune 30, 2022 compared to the comparable period in the prior year was due to an increase in the average balance of loans and investments, increased asset yields and a decrease in the cost of interest-bearing liabilities, partially offset by an increase in the average balance of interest-bearing liabilities and a decrease in PPP loan income. Net interest income on a tax-equivalent basis for the six months endedJune 30, 2022 was$99.1 million , an increase of$5.9 million , or 6.3%, compared to the same period in 2021. The increase in tax-equivalent net interest income for the six months endedJune 30, 2022 compared to the comparable period in the prior year was due to loan and investment average balance growth outpacing declines in asset yields and a decrease in the cost of interest-bearing liabilities, offset by an increase in the average balance of interest-bearing liabilities and a decrease in PPP loan income. The net interest margin, on a tax-equivalent basis, was 3.19% and 3.04% for the three and six months endedJune 30, 2022 , respectively, compared to 3.15% and 3.14% for the three and six months endedJune 30, 2021 , respectively. Excess liquidity reduced the net interest margin by approximately 23 and 28 basis points for the three and six months endedJune 30, 2022 , respectively, compared to ten basis points for the three and six months endedJune 30, 2021 . During the quarter endedJune 30, 2022 , excess liquidity diminished and we returned to a pre-pandemic liquidity level at the end of the quarter. PPP loans had a favorable impact on net interest margin of one and two basis points for the three and six months endedJune 30, 2022 , respectively, compared to a favorable impact on net interest margin of eleven and seven basis points for the three and six months endedJune 30, 2021 , respectively. During the second quarter, the Bank entered into a four-year$250 million interest rate swap (representing approximately 13% of the Bank's variable rate loans), whereby the Bank receives a fixed rate of 5.99% and pays a variable rate equal to the Prime Rate. During the second quarter of 2022, the swap contributed$707 thousand to net interest income and four basis points to net interest margin. Excluding the impact of excess liquidity and PPP loans, the net interest margin, on a tax-equivalent basis, was 3.41% and 3.30% for the three and six months endedJune 30, 2022 , respectively, compared to 3.14% and 3.17% for the three and six months endedJune 30, 2021 , respectively. 47 --------------------------------------------------------------------------------
Table 1-Average Balances and Interest Rates-Tax-Equivalent Basis
Three Months Ended June 30,
2022 2021
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets:
Interest-earning deposits with other banks
0.70 %$ 215,349 $ 46 0.09 % U.S. government obligations 2,000 11 2.21 6,999 35 2.01 Obligations of states and political subdivisions* 2,302 17 2.96 6,070 58
3.83
Other debt and equity securities 511,439 2,727 2.14 372,625 1,364
1.47
Federal Home Loan Bank ,Federal Reserve Bank and other stock 26,221 344 5.26 25,872 360
5.58
Total interest-earning deposits, investments and other interest-earning assets 1,016,222 3,923 1.55 626,915 1,863
1.19
Commercial, financial and agricultural loans 937,846 9,037 3.86 826,464 6,910
3.35
Paycheck Protection Program loans 7,644 155 8.13 408,928 4,778
4.69
Real estate-commercial and construction loans 3,004,509 28,527 3.81 2,701,137 24,931 3.70 Real estate-residential loans 1,166,201 10,758 3.70 1,065,065 9,836 3.70 Loans to individuals 26,782 305 4.57 25,284 251 3.98 Municipal loans and leases* 235,922 2,404 4.09 251,311 2,598 4.15 Lease financings 141,676 2,105 5.96 110,921 1,819 6.58 Gross loans and leases 5,520,580 53,291 3.87 5,389,110 51,123 3.80 Total interest-earning assets 6,536,802 57,214 3.51 6,016,025 52,986 3.53 Cash and due from banks 55,634 52,948 Allowance for credit losses, loans and leases (68,426) (73,052) Premises and equipment, net 50,266 55,903 Operating lease right-of-use assets 30,222 33,992 Other assets 357,903 357,813 Total assets$ 6,962,401 $ 6,443,629 Liabilities: Interest-bearing checking deposits$ 851,324 570 0.27$ 786,931 $ 487 0.25 Money market savings 1,405,536 1,552 0.44 1,219,375 831 0.27 Regular savings 1,070,480 237 0.09 978,807 282 0.12 Time deposits 452,989 1,227 1.09 485,060 1,559 1.29 Total time and interest-bearing deposits 3,780,329 3,586 0.38 3,470,173 3,159 0.37 Short-term borrowings 17,253 11 0.26 19,109 3 0.06 Long-term debt 95,000 321 1.36 95,000 321 1.36 Subordinated notes 98,988 1,328 5.38 172,016 2,201 5.13 Total borrowings 211,241 1,660 3.15 286,125 2,525 3.54 Total interest-bearing liabilities 3,991,570 5,246 0.53 3,756,298 5,684 0.61 Noninterest-bearing deposits 2,122,844 1,880,916 Operating lease liabilities 33,300 37,426 Accrued expenses and other liabilities 43,277 40,239 Total liabilities 6,190,991 5,714,879 Shareholders' Equity: Common stock 157,784 157,784 Additional paid-in capital 298,241 296,599 Retained earnings and other equity 315,385 274,367 Total shareholders' equity 771,410 728,750 Total liabilities and shareholders' equity$ 6,962,401 $ 6,443,629 Net interest income$ 51,968 $ 47,302 Net interest spread 2.98 2.92 Effect of net interest-free funding sources 0.21 0.23 Net interest margin 3.19 % 3.15 % Ratio of average interest-earning assets to average interest-bearing liabilities 163.77 % 160.16 % *Obligations of states and political subdivisions and municipal loans and leases are tax-exempt earning assets. Notes: For rate calculation purposes, average loan and lease categories include deferred fees and costs and purchase accounting adjustments. Net interest income includes net deferred (costs) fees of$(618) thousand and$2.7 million for the three months endedJune 30, 2022 and 2021, respectively. Nonaccrual loans and leases have been included in the average loan and lease balances. Loans held for sale have been included in the average loan balances. Tax-equivalent amounts for the three months endedJune 30, 2022 and 2021 have been calculated using the Corporation's federal applicable rate of 21%. 48 -------------------------------------------------------------------------------- Six Months Ended June 30, 2022 2021 Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets:
Interest-earning deposits with other banks
0.39 %$ 226,387 $ 102 0.09 % U.S. government obligations 3,602 37 2.07 6,999 71 2.05 Obligations of states and political subdivisions* 2,317 36 3.13 8,792 163
3.74
Other debt and equity securities 512,998 5,066 1.99 364,272 2,631
1.46
Federal Home Loan Bank ,Federal Reserve Bank and other stock 26,665 699 5.29 26,119 708
5.47
Total interest-earning deposits, investments and other interest-earning assets 1,148,584 7,019 1.23 632,569 3,675
1.17
Commercial, financial and agricultural loans 919,801 16,608 3.64 804,458 13,708
3.44
Paycheck Protection Program loans 12,994 746 11.58 457,663 9,302
4.10
Real estate-commercial and construction loans 2,954,831 54,347 3.71 2,661,778 49,389 3.74 Real estate-residential loans 1,141,416 20,640 3.65 1,051,110 19,709 3.78 Loans to individuals 26,293 543 4.16 25,862 516 4.02 Municipal loans and leases* 239,197 4,838 4.08 248,490 5,128 4.16 Lease financings 138,593 4,180 6.08 108,317 3,556 6.62 Gross loans and leases 5,433,125 101,902 3.78 5,357,678 101,308 3.81 Total interest-earning assets 6,581,709 108,921 3.34 5,990,247 104,983 3.53 Cash and due from banks 54,671 54,123 Allowance for credit losses, loans and leases (70,237) (78,125) Premises and equipment, net 52,097 55,865 Operating lease right-of-use assets 30,308 34,013 Other assets 356,406 357,589 Total assets$ 7,004,954 $ 6,413,712 Liabilities: Interest-bearing checking deposits 866,310 1,013 0.24$ 802,350 $ 977 0.25 Money market savings 1,473,680 2,456 0.34 1,231,457 1,684 0.28 Regular savings 1,046,150 475 0.09 969,073 580 0.12 Time deposits 463,232 2,533 1.10 505,318 3,318 1.32 Total time and interest-bearing deposits 3,849,372 6,477 0.34 3,508,198 6,559 0.38 Short-term borrowings 17,443 13 0.15 18,506 5 0.05 Long-term debt 95,000 638 1.35 98,149 669 1.37 Subordinated notes 98,950 2,656 5.41 177,647 4,494 5.10 Total borrowings 211,393 3,307 3.15 294,302 5,168 3.54 Total interest-bearing liabilities 4,060,765 9,784 0.49 3,802,500 11,727 0.62 Noninterest-bearing deposits 2,094,397 1,815,572 Operating lease liabilities 33,375 37,419 Accrued expenses and other liabilities 43,541 43,897 Total liabilities 6,232,078 5,699,388 Shareholders' Equity: Common stock 157,784 157,784 Additional paid-in capital 298,606 296,369 Retained earnings and other equity 316,486 260,171 Total shareholders' equity 772,876 714,324 Total liabilities and shareholders' equity$ 7,004,954 $ 6,413,712 Net interest income$ 99,137 $ 93,256 Net interest spread 2.85 2.91 Effect of net interest-free funding sources 0.19 0.23 Net interest margin 3.04 % 3.14 % Ratio of average interest-earning assets to average interest-bearing liabilities 162.08 % 157.53 % *Obligations of states and political subdivisions and municipal loans and leases are tax-exempt earning assets. Notes: For rate calculation purposes, average loan and lease categories include deferred fees and costs and purchase accounting adjustments. Net interest income includes net deferred (costs) fees of$(754) thousand and$5.0 million for the six months endedJune 30, 2022 and 2021, respectively. 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 six months endedJune 30, 2022 and 2021 have been calculated using the Corporation's federal applicable rate of 21%. 49 --------------------------------------------------------------------------------
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 Six Months Ended
June 30, 2022 Versus 2021 June 30, 2022 Versus 2021
Volume Rate Volume Rate
(Dollars in thousands) Change Change Total Change Change Total
Interest income:
Interest-earning deposits with other banks 117 661 $ 778 359 720 $ 1,079
U.S. government obligations (27) 3 (24) (35) 1 (34)
Obligations of states and political subdivisions (30) (11) (41) (104) (23) (127)
Other debt and equity securities 613 750 1,363 1,289 1,146
2,435
Federal Home Loan Bank ,Federal Reserve Bank and other stock 5 (21) (16) 15 (24)
(9)
Interest on deposits, investments and other earning assets 678 1,382 2,060 1,524 1,820
3,344
Commercial, financial and agricultural loans 999 1,128 2,127 2,063 837
2,900
Paycheck Protection Program loans (6,659) 2,036 (4,623) (14,772) 6,216
(8,556)
Real estate-commercial and construction loans 2,843 753 3,596 5,360 (402)
4,958
Real estate-residential loans 922 - 922 1,633 (702) 931 Loans to individuals 16 38 54 9 18 27 Municipal loans and leases (157) (37) (194) (191) (99) (290) Lease financings 469 (183) 286 932 (308) 624 Interest and fees on loans and leases (1,567) 3,735 2,168 (4,966) 5,560 594 Total interest income (889) 5,117 4,228 (3,442) 7,380 3,938 Interest expense: Interest-bearing checking deposits 42 41 83 77 (41) 36 Money market savings 140 581 721 370 402 772 Regular savings 27 (72) (45) 44 (149) (105) Time deposits (99) (233) (332) (261) (524) (785) Total time and interest-bearing deposits 110 317 427 230 (312) (82) Short-term borrowings - 8 8 - 8 8 Long-term debt - - - (21) (10) (31) Subordinated notes (975) 102 (873) (2,096) 258 (1,838) Interest on borrowings (975) 110 (865) (2,117) 256 (1,861) Total interest expense (865) 427 (438) (1,887) (56) (1,943) Net interest income$ (24) $ 4,690 $ 4,666 $ (1,555) $ 7,436 $ 5,881 50
--------------------------------------------------------------------------------
Provision for Credit Losses
The provision for credit losses for the three months endedJune 30, 2022 was$6.7 million , primarily driven by a$5.5 million increase (after-tax charge of$4.3 million ) in reserves due to loan growth, a specific reserve of$1.1 million related to a commercial real estate loan that was placed on nonaccrual status during the quarter and an incremental provision of$736 thousand related to an existing nonaccrual commercial real estate loan. The reversal of provision for credit losses for the three months endedJune 30, 2021 was$59 thousand driven by a$2.7 million increase (after-tax charge of$2.1 million ) in reserves due to loan growth outpaced by favorable changes in economic-related assumptions within the Corporation's CECL model. The provision for credit losses for the six months endedJune 30, 2022 was$3.2 million primarily driven by a$6.8 million increase (after-tax charge of$5.4 million ) in reserves due to loan growth and specific reserves of$2.8 million on two nonaccrual commercial real estate properties. These increases were partially offset by$7.3 million (after-tax benefit of$5.8 million ) of changes in economic-related assumptions within the Corporation's CECL model. Additionally, reserves on unfunded commitments and investment securities increased$990 thousand during the six months endedJune 30, 2022 . The reversal of the provision for credit losses for the six months endedJune 30, 2021 was$11.3 million , of which$15.8 million (after-tax benefit of$12.5 million ) was attributable to favorable changes in economic-related assumptions within the Corporation's CECL model, partially offset by a reserve increase attributable to loan growth. Noninterest Income
The following table presents noninterest income for the three and six months
ended
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(Dollars in thousands) 2022 2021 Amount Percent 2022 2021 Amount Percent
Trust fee income $ 1,998 $ 2,157 $ (159) (7.4 %) $ 4,100 $ 4,191 $ (91) (2.2 %)
Service charges on deposit
accounts 1,574 1,314 260 19.8 3,078 2,596 482 18.6
Investment advisory commission
and fee income 4,812 4,558 254 5.6 9,964 9,255 709 7.7
Insurance commission and fee
income 4,629 3,839 790 20.6 10,199 8,794 1,405 16.0
Other service fee income 3,309 2,748 561 20.4 6,065 4,940 1,125 22.8
Bank owned life insurance
income 705 1,620 (915) (56.5) 1,404 2,337 (933) (39.9)
Net gain on sales of investment
securities - 54 (54) N/M 30 119 (89) (74.8)
Net gain on mortgage banking
activities 1,230 3,461 (2,231) (64.5) 3,159 9,399 (6,240) (66.4)
Other income 741 479 262 54.7 1,469 1,849 (380) (20.6)
Total noninterest income $ 18,998 $ 20,230 $ (1,232) (6.1 %) $ 39,468 $ 43,480 $ (4,012) (9.2 %)
Three and six months ended
Noninterest income for the three months endedJune 30, 2022 was$19.0 million , a decrease of$1.2 million , or 6.1%, from the three months endedJune 30, 2021 . Noninterest income for the six months endedJune 30, 2022 was$39.5 million , a decrease of$4.0 million , or 9.2%, from the six months endedJune 30, 2021 . The net gain on mortgage banking activities decreased$2.2 million , or 64.5%, for the three months endedJune 30, 2022 and$6.2 million , or 66.4%, for the six months endedJune 30, 2022 from the comparable periods in the prior year, primarily due to a decrease in loan sales and a contraction of margins. Bank owned life insurance decreased$915 thousand , or 56.5%, for the three months endedJune 30, 2022 and$933 thousand , or 39.9%, for the six months endedJune 30, 2022 from the comparable periods in the prior year, primarily due to a death benefit claim of$893 thousand in the second quarter of 2021. Insurance commission and fee income increased$790 thousand , or 20.6%, for the three months endedJune 30, 2022 and$1.4 million , or 16.0%, for the six months endedJune 30, 2022 from the comparable periods in the prior year, primarily due to incremental revenue attributable to the insurance agency the Corporation acquired in the fourth quarter of 2021. Investment advisory commission and fee income increased$254 thousand , or 5.6%, for the three months endedJune 30, 2022 and$709 thousand , or 7.7%, from the comparable periods in the prior year, primarily due to new customer relationships and appreciation 51 --------------------------------------------------------------------------------
of assets under management, as a majority of investment advisory fees are billed based on the prior quarter-end assets under management balance.
Other service fee income increased$561 thousand , or 20.4%, for the three months endedJune 30, 2022 and$1.1 million , or 22.8%, for the six months endedJune 30, 2022 from the comparable periods in the prior year. Mortgage servicing fees increased$357 thousand for the three months endedJune 30, 2022 and$619 thousand for the six months endedJune 30, 2022 from the comparable periods in the prior year driven by reduced amortization as a result of a decrease in prepayment speeds. Interchange fee income increased$115 thousand for the three months endedJune 30, 2022 and$291 thousand for the six months endedJune 30, 2022 from the comparable period in the prior year due to increased customer activity.
Noninterest Expense
The following table presents noninterest expense for the three and six months
ended
Three Months Ended Six Months Ended
June 30, Change June 30, Change
(Dollars in thousands) 2022 2021 Amount Percent 2022 2021 Amount Percent
Salaries, benefits and
commissions $ 29,133 $ 25,396 $ 3,737 14.7 % $ 57,378 $ 50,176 $ 7,202 14.4 %
Net occupancy 2,422 2,656 (234) (8.8) 5,138 5,395 (257) (4.8)
Equipment 977 968 9 0.9 1,959 1,914 45 2.4
Data processing 3,708 3,064 644 21.0 7,275 6,114 1,161 19.0
Professional fees 2,844 2,015 829 41.1 4,982 3,763 1,219 32.4
Marketing and advertising 693 561 132 23.5 1,118 841 277 32.9
Deposit insurance premiums 812 613 199 32.5 1,705 1,249 456 36.5
Intangible expenses 342 249 93 37.3 683 498 185 37.1
Other expense 6,440 5,764 676 11.7 12,545 10,876 1,669 15.3
Total noninterest expense $ 47,371 $ 41,286 $ 6,085 14.7 % $ 92,783 $ 80,826 $ 11,957 14.8 %
Three and six months ended
Noninterest expense for the three months endedJune 30, 2022 was$47.4 million , an increase of$6.1 million , or 14.7%, from the three months endedJune 30, 2021 . Noninterest expense for the six months endedJune 30, 2022 was$92.8 million , an increase of$12.0 million , or 14.8%, from the six months endedJune 30, 2021 . The results for the three and six months endedJune 30, 2022 include approximately$1.4 million and$2.1 million , respectively, in expenses related to our digital transformation initiative, a comprehensive digital platform which will blend our core operating systems together and allow Univest to seamlessly sell existing products and services, digitally, across an expanded footprint. Salaries, benefits and commissions increased$3.7 million , or 14.7%, for the three months endedJune 30, 2022 and$7.2 million , or 14.4%, for the six months endedJune 30, 2022 from the comparable periods in the prior year. These increases reflect our continued investment in revenue producing staff across all business lines, including the acquisition of the Paul I. Sheaffer insurance agency, and annual merit increases. Additionally, during the three and six months endedJune 30, 2022 , we incurred$353 thousand and$740 thousand , respectively, of short-term incremental guaranties related to the hiring of new producers in our mortgage banking line of business. Finally, during the six months endedJune 30, 2021 , salaries, benefits and commissions expense was benefited by$616 thousand of incremental capitalized compensation related to the origination of PPP loans. Professional fees increased$829 thousand , or 41.1%, for the three months endedJune 30, 2022 and$1.2 million , or 32.4%, for the six months endedJune 30, 2022 from the comparable periods in the prior year. The increase for the three months endedJune 30, 2022 was primarily attributable to$1.2 million of consultant fees spent related to the previously discussed digital transformation initiative, as compared to our$230 thousand investment in our Diversity, Equity and Inclusion training initiatives for the three months endedJune 30, 2021 . The increase for the six months endedJune 30, 2022 was primarily attributable to$1.9 million of consultant fees spent related to the digital transformation initiative, as compared to our$506 thousand investment in our Diversity, Equity and Inclusion training initiatives for the six months endedJune 30, 2021 . Deposit insurance premiums increased$199 thousand , or 32.5%, for the three months endedJune 30, 2022 and$456 thousand , or 36.5%, for the six months endedJune 30, 2022 from the comparable periods in the prior year driven by an increased assessment base. 52 -------------------------------------------------------------------------------- Data processing expenses increased$644 thousand , or 21.0%, for the three months endedJune 30, 2022 and$1.2 million , or 19.0%, for the six months endedJune 30, 2022 from the comparable periods in 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, outsourced data processing solutions, and$155 thousand and$258 thousand in support of the digital transformation initiative for the respective periods. Other expense increased$676 thousand , or 11.7%, for the three months endedJune 30, 2022 and$1.7 million , or 15.3%, for the six months endedJune 30, 2022 from the comparable periods in the prior year. Recruiting costs increased$138 thousand and$420 thousand for the three and six months endedJune 30, 2022 , respectively, due to increased hiring activity, including the entry into our two new expansion markets. Travel and entertainment expenses increased$309 thousand and$574 thousand for the three and six months endedJune 30, 2022 , respectively, as related activities have largely returned to pre-pandemic levels. Additionally, the six months endedJune 30, 2022 included incurred costs of$330 thousand as a result of a customer who was defrauded.
Tax Provision
The Corporation recognized a tax expense of$3.3 million and$4.9 million for the three months endedJune 30, 2022 and 2021, respectively, resulting in an effective rate of 19.8% and 19.0%, respectively. The Corporation recognized a tax expense of$8.1 million and$12.7 million for the six months endedJune 30, 2022 and 2021, respectively, resulting in an effective rate of 19.5% and 19.2%, respectively. The effective tax rates for the three and six months endedJune 30, 2022 and 2021 reflects the benefits of tax-exempt income from investments in municipal securities and loans and leases.
Financial Condition
Assets
The following table presents assets at the dates indicated:
At December 31, Change
(Dollars in thousands) At June 30, 2022 2021 Amount Percent
Cash and cash equivalents $ 94,777 $ 890,150 $ (795,373) (89.4 %)
Investment securities, net of allowance
for credit losses 514,124 496,989 17,135 3.4
Federal Home Loan Bank , Federal Reserve
Bank and other stock, at cost 29,116 28,186 930 3.3
Loans held for sale 8,352 21,600 (13,248) (61.3)
Loans and leases held for investment 5,661,777 5,310,017 351,760 6.6
Allowance for credit losses, loans and
leases (72,011) (71,924) (87) 0.1
Premises and equipment, net 50,080 56,882 (6,802) (12.0)
Operating lease right-of-use assets 30,929 30,407 522 1.7
Goodwill and other intangibles, net 187,238 187,358 (120) (0.1)
Bank owned life insurance 120,103 118,699 1,404 1.2
Accrued interest receivable and other
assets 76,328 54,057 22,271 41.2
Total assets $ 6,700,813 $ 7,122,421 $ (421,608) (5.9 %)
Cash and Interest-Earning Deposits
Cash and interest-earning deposits decreased$795.4 million , or 89.4%, fromDecember 31, 2021 , primarily due to decreased interest earning deposits at theFederal Reserve Bank of$805.9 million as the Corporation used excess liquidity to fund loan growth and purchase investment securities. Additionally, cash decreased due to a seasonal decrease in public funds deposits as well as decreases in commercial and consumer deposits.
Total investment securities atJune 30, 2022 increased$17.1 million , or 3.4%, fromDecember 31, 2021 . Purchases of$97.1 million , primarily residential mortgage-backed securities, were partially offset by maturities and pay-downs of$38.1 53 -------------------------------------------------------------------------------- million, decreases in the fair value of available-for-sale investment securities of$35.0 million , sales of$5.0 million , net amortization of purchased premiums and discounts of$872 thousand and a provision for credit losses of$763 thousand .
Loans and Leases
Gross loans and leases held for investment increased$351.8 million , or 6.6%, fromDecember 31, 2021 . Gross loans and leases held for investment, excluding PPP loans, atJune 30, 2022 increased$378.2 million or 7.2% fromDecember 31, 2021 . The growth in gross loans and leases held for investment, excluding PPP loans, was primarily due to increases in commercial, commercial real estate, construction, residential mortgage loans, and lease financings. As ofJune 30, 2022 ,$5.4 million in PPP loan originations remained outstanding.
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. AtJune 30, 2022 , nonaccrual loans and leases and accruing troubled debt restructured loans were$13.4 million and had a related allowance for credit losses on loans and leases of$1.1 million . AtDecember 31, 2021 , nonaccrual loans and leases and accruing troubled debt restructured loans were$33.3 million and had a related allowance for credit losses on loans and leases of$11 thousand . During the quarter, a nonaccrual commercial real estate loan was transferred to other real estate owned with a carrying value of$18.3 million . 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. The amount of individual reserve needed for these credits could change in future periods subject to changes in facts and judgements related to these credits. Net loan and lease charge-offs for the three months endedJune 30, 2022 were$1.7 million compared to$243 thousand for the same period in the prior year. Net loan and lease charge-offs for the six months endedJune 30, 2022 were$1.8 million compared to$531 thousand for the same period in the prior year. During the second quarter of 2022, a$1.7 million charge-off was recorded against an existing nonaccrual commercial real estate loan. Other real estate owned was$18.6 million atJune 30, 2022 and$279 thousand atDecember 31, 2021 due to the transfer of a nonaccrual commercial real estate loan to other real estate owned noted above. 54 --------------------------------------------------------------------------------
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) AtJune 30 ,
2022 At
$ 13,355 $ 33,210
Accruing troubled debt restructured loans and lease modifications not included in the above
50 51
Accruing loans and leases, 90 days or more past due 2,784 498
Total nonperforming loans and leases $ 16,189 $ 33,759
Other real estate owned 18,604 279
Total nonperforming assets $ 34,793 $ 34,038
*Nonaccrual troubled debt restructured loans and lease modifications in nonaccrual loans and leases in the above table
$ 808 $ 758
Loans and leases held for investment $ 5,661,777 $ 5,310,017
Allowance for credit losses, loans and leases 72,011 71,924
Allowance for credit losses, loans and leases / loans and leases held for investment
1.27 % 1.35 %
Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment
0.24 % 0.63 %
Allowance for credit losses, loans and leases / nonaccrual
loans and leases 539.21 % 216.57 %
The following table provides additional information on the Corporation's nonaccrual loans held for investment:
At December 31,
(Dollars in thousands) At June 30, 2022 2021
Total nonaccrual loans and leases, including nonaccrual
troubled debt restructured loans and lease modifications $ 13,355
4,512 1,429
Life-to-date partial charge-offs on nonaccrual loans and leases
2,224 536
Specific reserves on individually analyzed loans 1,089 11
55--------------------------------------------------------------------------------
Table 4-Loan Concentration
The following table provides summarized detail related to outstanding commercial loan balances, excluding PPP loans, segmented by industry description as ofJune 30, 2022 : (Dollars in thousands) As of June 30, 2022 Total Outstanding Balance (excl % of Commercial Loan Industry Description PPP) Portfolio CRE - Retail$ 379,935 8.2 % Animal Production 315,801 6.8 CRE - Multi-family 262,182 5.7 CRE - 1-4 Family Residential Investment 240,887 5.2 CRE - Office 215,847 4.7 Hotels & Motels (Accommodation) 188,811 4.1 CRE - Industrial / Warehouse 185,241 4.0 Education 161,151 3.5 Nursing and Residential Care Facilities 154,034 3.3 Specialty Trade Contractors 143,724 3.1 Homebuilding (tract developers, remodelers) 118,877 2.6 Motor Vehicle and Parts Dealers 112,372 2.4 CRE - Medical Office 108,978 2.3 CRE - Mixed-Use - Residential 106,228 2.3 Merchant Wholesalers, Durable Goods 100,825 2.2 Crop Production 88,786 1.9 Food Manufacturing 85,953 1.9 Administrative and Support Services 75,587 1.6 Rental and Leasing Services 72,560 1.6 Wood Product Manufacturing 71,961 1.6 Food Services and Drinking Places 69,209 1.5 Merchant Wholesalers, Nondurable Goods 66,568 1.4 Fabricated Metal Product Manufacturing 63,016 1.4 Personal and Laundry Services 60,774 1.3 Religious Organizations, Advocacy Groups 58,409 1.3 Miniwarehouse / Self-Storage 54,761 1.2 Repair and Maintenance 53,472 1.2 CRE - Mixed-Use - Commercial 52,080 1.1 Private Equity & Special Purpose Entities 51,853 1.1 Truck Transportation 51,191 1.1 Industries with >$50 million in outstandings$ 3,771,073 81.3 % Industries with <$50 million in outstandings$ 866,668 18.7 % Total Commercial Loans$ 4,637,741 100.0 % Total Outstanding Consumer Loans and Lease Financings
Balance
Real Estate-Residential Secured for Personal Purpose $
629,144
Real Estate-Home Equity Secured for Personal Purpose 168,536 Loans to Individuals 27,061 Lease Financings 193,937 Total Consumer Loans and Lease Financings$ 1,018,678 Total$ 5,656,419
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$738 thousand and$969 thousand for the three months endedJune 30, 2022 and 2021, respectively. The amortization of intangible assets was$1.6 million and$2.0 million for the six months endedJune 30, 2022 and 2021, respectively. See Note 5 to the Condensed Unaudited Consolidated Financial Statements, "Goodwill and Other Intangible Assets," for a summary of intangible assets atJune 30, 2022 andDecember 31, 2021 . 56 -------------------------------------------------------------------------------- The Corporation also has goodwill with a net carrying value of$175.5 million atJune 30, 2022 andDecember 31, 2021 , 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 six months endedJune 30, 2022 and 2021. 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 December 31, Change
(Dollars in thousands) At June 30, 2022 2021 Amount Percent
Deposits $ 5,563,048 $ 6,055,124 $ (492,076) (8.1 %)
Short-term borrowings 97,606 20,106 77,500 385.5
Long-term debt 95,000 95,000 - -
Subordinated notes 99,030 98,874 156 0.2
Operating lease liabilities 33,951 33,453 498 1.5
Accrued interest payable and other
liabilities 48,253 46,070 2,183 4.7
Total liabilities $ 5,936,888 $ 6,348,627 $ (411,739) (6.5 %)
Deposits
Total deposits decreased
Borrowings
Total borrowings increased$77.7 million , or 36.3%, fromDecember 31, 2021 , due to an increase of$93.6 million in short-term FHLB overnight borrowings as excess liquidity diminished and we returned to a pre-pandemic liquidity level, partially offset by a decrease of$16.1 million in short-term customer repurchase agreements.
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