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 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 inherently 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 assumptions with respect to future business strategies and decisions that are subject to change. Such 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 impacting various lines of business; •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; •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; •Return on investment decisions; •System failures or cyber-security breaches of our information technology infrastructure and those of our third-party service providers; •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. The COVID-19 pandemic has caused significant economic dislocation inthe United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place at home. While jurisdictions in which we operate have gradually allowed the reopening of businesses and other organizations and removed the sheltering restrictions, it is premature to assess whether doing so will result in a meaningful increase in economic activity and the impact of such actions on further COVID-19 cases. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak 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. As a result of the COVID-19 pandemic and the related 52 -------------------------------------------------------------------------------- Table of Contents adverse local and 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 substantially and successfully reopen, and high 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 on loans and leases may increase if borrowers experience financial difficulties; •The net worth and liquidity of loan guarantors may decline; •A further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on its goodwill or core deposit and customer relationships intangibles that could result in an impairment charge being recorded for that period, that would adversely impact our results of operations and the ability of the Bank to pay dividends to us; •As a result of the decline in theFederal Reserve's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities; •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 a result of an increase in the number of employees working remotely; •FDIC premiums may increase if the agency experience additional resolution costs; and •We face litigation, regulatory enforcement and reputation risk as a result of our participation in the PPP 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, 2019 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 had identified the fair value measurement of investment securities available-for-sale and the calculation of the allowance for credit losses, loans and leases, as critical accounting policies. For more information on these critical accounting policies, please refer to the Corporation's 2019 Annual Report on Form 10-K. See Note 1, "Summary of Significant Accounting Policies" for additional information on the adoption of ASC 326, which changed the methodology under which management calculates its reserve for loans and leases, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses, in accordance with ASC 326, to be a critical accounting policy.
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 and the Bank. 53 -------------------------------------------------------------------------------- Table of Contents Through its wholly-owned subsidiaries, the Bank provides a variety of financial services for individuals, businesses, municipalities and non-profit organizations. 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 Nine Months Ended
September 30, Change September 30, Change
(Dollars in thousands, except
per share data) 2020 2019 Amount Percent 2020 2019 Amount Percent
Net income $ 18,119 $ 17,662 $ 457 2.6 % $ 21,042 $ 50,209 $ (29,167) (58.1 %)
Net income per share:
Basic $ 0.62 $ 0.60 $ 0.02 3.3 $ 0.72 $ 1.71 $ (0.99) (57.9)
Diluted 0.62 0.60 0.02 3.3 0.72 1.71 (0.99) (57.9)
Return on average assets 1.15 % 1.32 % (17 BP) (12.9) 0.48 % 1.30 % (82 BP) (63.1)
Return on average equity 10.89 % 10.62 % 27 BP 2.5 4.22 % 10.40 % (618 BP) (59.4)
The Corporation reported net income of $18.1 million , or $0.62 diluted earnings
per share, for the three months ended September 30, 2020 , compared to net income
of $17.7 million , or $0.60 diluted earnings per share, for the three months
ended September 30, 2019 . Net income for the nine months ended September 30,
2020 was $21.0 million , or $0.72 diluted earnings per share, compared to net
income of $50.2 million , or $1.71 diluted earnings per share, for the nine
months ended September 30, 2019 .
The Corporation adopted CECL effective January 1, 2020 , as discussed in Note 1.
Summary of Significant Accounting Policies in the Notes to the Condensed
Consolidated Financial Statements. Upon adoption, the allowance for credit
losses on loans and leases increased by $12.9 million , the allowance for credit
losses on investments increased by $300 thousand , and the reserve for unfunded
commitments increased by $1.1 million , which, in the aggregate, resulted in an
after-tax retained earnings adjustment of $11.3 million .
During the three months ended September 30, 2020 , the Corporation recorded a
provision for credit losses of $3.9 million , of which $5.6 million provision 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 ), or $0.01
diluted earnings per share, which was attributable to changes in economic
assumptions within the Corporation's CECL model, which were predominately driven
by COVID-19. During the nine months ended September 30, 2020 , the Corporation
recorded CECL related charges of $49.5 million , of which $40.5 million
(after-tax charge of $32.0 million ), or $1.10 diluted earnings per share, was
attributable to changes in economic assumptions within the CECL model. The
provision for loan and lease losses for the three and nine months ended
September 30, 2019 was $1.5 million and $6.3 million , respectively.
The Corporation originated approximately 2,570 loans totaling approximately $511
million through the PPP, which was enacted as a component of the CARES Act that
was signed into law on March 27, 2020 . Through this program, the Corporation
recorded income of $4.7 million within interest income related to these loans,
in addition to recording incremental capitalized compensation of $1.3 million
related to the origination of PPP loans. As of September 30, 2020 , the
Corporation had $9.5 million of net deferred fees on our balance sheet related
to these loans.
54
--------------------------------------------------------------------------------Table of Contents 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, the tax-equivalent yields earned on average assets, the cost of average liabilities, and shareholders' equity on a tax-equivalent basis for the three and nine months endedSeptember 30, 2020 and 2019. 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, 2020 was$44.5 million , an increase of$1.2 million , or 2.7%, compared to the three months endedSeptember 30, 2019 . Net interest income on a tax-equivalent basis for the nine months endedSeptember 30, 2020 was$131.7 million , an increase of$3.0 million , or 2.3%, compared to the same period in 2019. The increase in tax-equivalent net interest income for the three and nine months endedSeptember 30, 2020 compared to same period in the prior year was primarily due to lower deposit and borrowing costs and growth in loans partially offset by a decrease in yield on loans. The net interest margin, on a tax-equivalent basis, was 3.02% and 3.21% for the three and nine months endedSeptember 30, 2020 , respectively, compared to 3.52% and 3.64% for the three and nine months endedSeptember 30, 2019 , respectively. Excess liquidity reduced the net interest margin by approximately 18 and 14 basis points for the three and nine months endedSeptember 30, 2020 , respectively, compared to 13 and seven basis points for the three and nine months endedSeptember 30, 2019 , respectively. This excess liquidity was primarily driven by strong deposit balance growth over the last year. PPP loans reduced net interest margin by ten and seven basis points for the three and nine months endedSeptember 30, 2020 , respectively. Excluding the impact of excess liquidity and the impact of PPP loans, the net interest margin, on a tax-equivalent basis, was 3.30% and 3.42% for the three and nine months endedSeptember 30, 2020 , respectively, compared to 3.65% and 3.70% for the three and nine months endedSeptember 30, 2019 , respectively. 55 -------------------------------------------------------------------------------- Table of Contents Table 1-Average Balances and Interest Rates-Tax-Equivalent Basis Three Months Ended September 30, 2020 2019 Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets:
Interest-earning deposits with other banks
0.11 %$ 213,623 $ 1,178 2.19 % U.S. government obligations 6,998 36 2.05 14,154 62 1.74 Obligations of states and political subdivisions 18,004 167 3.69 42,465 316
2.95
Other debt and equity securities 360,219 1,610 1.78 403,480 2,519
2.48
Federal Home Loan Bank ,Federal Reserve Bank and other stock 28,651 419 5.82 30,857 519
6.67
Total interest-earning deposits, investments and other interest-earning assets 782,053 2,332 1.19 704,579 4,594
2.59
Commercial, financial and agricultural loans 807,376 7,330 3.61 800,006 9,952
4.94
Paycheck Protection Program loans 500,549 2,811 2.23 - -
-
Real estate-commercial and construction loans 2,358,971 23,547 3.97 1,966,593 23,439 4.73 Real estate-residential loans 1,009,407 10,380 4.09 956,224 11,570 4.80 Loans to individuals 28,663 309 4.29 31,504 490 6.17 Municipal loans and leases 267,364 2,839 4.22 333,734 3,413 4.06 Lease financings 97,707 1,662 6.77 82,424 1,482 7.13 Gross loans and leases 5,070,037 48,878 3.84 4,170,485 50,346 4.79 Total interest-earning assets 5,852,090 51,210 3.48 4,875,064 54,940 4.47 Cash and due from banks 56,715 53,019 Allowance for credit losses, loans and leases (87,046) (33,152) Premises and equipment, net 55,755 57,881 Operating lease right-of-use assets 33,875 35,238 Other assets 354,216 329,817 Total assets$ 6,265,605 $ 5,317,867 Liabilities: Interest-bearing checking deposits$ 725,580 $ 468 0.26$ 497,185 $ 678 0.54 Money market savings 1,116,628 897 0.32 1,004,806 4,112 1.62 Regular savings 901,716 449 0.20 805,632 963 0.47 Time deposits 525,656 2,214 1.68 715,520 3,681 2.04 Total time and interest-bearing deposits 3,269,580 4,028 0.49 3,023,143 9,434 1.24 Short-term borrowings 130,359 97 0.30 32,375 94 1.15 Long-term debt 208,776 742 1.41 167,338 866 2.05 Subordinated notes 155,945 1,891 4.82 94,724 1,261 5.28 Total borrowings 495,080 2,730 2.19 294,437 2,221 2.99 Total interest-bearing liabilities 3,764,660 6,758 0.71 3,317,580 11,655 1.39 Noninterest-bearing deposits 1,760,818 1,265,027 Operating lease liabilities 37,170 38,364 Accrued expenses and other liabilities 41,010 37,373 Total liabilities 5,603,658 4,658,344 Shareholders' Equity: Common stock 157,784 157,784 Additional paid-in capital 296,272 294,138 Retained earnings and other equity 207,891 207,601 Total shareholders' equity 661,947 659,523 Total liabilities and shareholders' equity$ 6,265,605 $ 5,317,867 Net interest income$ 44,452 $ 43,285 Net interest spread 2.77 3.08 Effect of net interest-free funding sources 0.25 0.44 Net interest margin 3.02 % 3.52 % Ratio of average interest-earning assets to average interest-bearing liabilities 155.45 % 146.95 % 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, 2020 and 2019 have been calculated using the Corporation's federal applicable rate of 21%. 56
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Table of Contents
Nine Months Ended September 30,
2020 2019
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets:
Interest-earning deposits with other banks
0.25 % $ 120,231 $ 2,016 2.24 %
U.S. government obligations 7,176 109 2.03 17,148 217 1.69
Obligations of states and political
subdivisions 26,019 696 3.57 55,220 1,369 3.31
Other debt and equity securities 379,729 6,460 2.27 394,834 7,722
2.61
Federal Home Loan Bank ,Federal Reserve Bank and other stock 29,689 1,308 5.88 31,713 1,640
6.91
Total interest-earning deposits, investments and other interest-earning assets 709,636 9,065 1.71 619,146 12,964
2.80
Commercial, financial and agricultural loans 815,178 23,291 3.82 810,321 31,299
5.16
Paycheck Protection Program loans 291,173 4,939 2.27 - -
-
Real estate-commercial and construction loans 2,244,143 70,574 4.20 1,900,901 68,108 4.79 Real estate-residential loans 1,001,904 31,702 4.23 945,477 34,465 4.87 Loans to individuals 29,251 1,043 4.76 31,985 1,518 6.35 Municipal loans and leases 291,845 9,081 4.16 333,816 9,939 3.98 Lease financings 92,780 4,808 6.92 81,698 4,376 7.16 Gross loans and leases 4,766,274 145,438 4.08 4,104,198 149,705 4.88 Total interest-earning assets 5,475,910 154,503 3.77 4,723,344 162,669 4.60 Cash and due from banks 51,544 48,231 Allowance for credit losses, loans and leases (66,977) (31,714) Premises and equipment, net 55,967 58,640 Operating lease right-of-use assets 34,278 36,056 Other assets 342,196 330,782 Total assets$ 5,892,918 $ 5,165,339 Liabilities: Interest-bearing checking deposits$ 642,935 $ 1,636 0.34$ 477,848 $ 1,849 0.52 Money market savings 1,079,279 4,653 0.58 968,894 12,094 1.67 Regular savings 863,772 1,716 0.27 804,457 2,790 0.46 Time deposits 568,517 7,801 1.83 686,794 10,015 1.95 Total time and interest-bearing deposits 3,154,503 15,806 0.67 2,937,993 26,748 1.22 Short-term borrowings 110,689 325 0.39 65,804 949 1.93 Long-term debt 196,053 2,268 1.55 157,484 2,441 2.07 Subordinated notes 115,376 4,372 5.06 94,664 3,783 5.34 Total borrowings 422,118 6,965 2.20 317,952 7,173 3.02 Total interest-bearing liabilities 3,576,621 22,771 0.85 3,255,945 33,921 1.39 Noninterest-bearing deposits 1,571,629 1,184,909 Operating lease liabilities 37,538 39,103 Accrued expenses and other liabilities 41,691 39,735 Total liabilities 5,227,479 4,519,692 Shareholders' Equity: Common stock 157,784 157,784 Additional paid-in capital 295,759 293,465 Retained earnings and other equity 211,896 194,398 Total shareholders' equity 665,439 645,647 Total liabilities and shareholders' equity$ 5,892,918 $ 5,165,339 Net interest income$ 131,732 $ 128,748 Net interest spread 2.92 3.21 Effect of net interest-free funding sources 0.29 0.43 Net interest margin 3.21 % 3.64 % Ratio of average interest-earning assets to average interest-bearing liabilities 153.10 % 145.07 % 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, 2020 and 2019 have been calculated using the Corporation's federal applicable rate of 21%. 57 -------------------------------------------------------------------------------- Table of Contents 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, 2020 Versus 2019 September 30, 2020 Versus 2019 Volume Rate Volume Rate (Dollars in thousands) Change Change Total Change Change Total Interest income: Interest-earning deposits with other banks$ 502 $ (1,580) $ (1,078) $ 1,190 $ (2,714) $ (1,524) U.S. government obligations (35) 9 (26) (145) 37 (108) Obligations of states and political subdivisions (214) 65 (149) (773) 100
(673)
Other debt and equity securities (250) (659) (909) (287) (975)
(1,262)
Federal Home Loan Bank ,Federal Reserve Bank and other stock (36) (64) (100) (100) (232)
(332)
Interest on deposits, investments and other earning assets (33) (2,229) (2,262) (115) (3,784)
(3,899)
Commercial, financial and agricultural loans 91 (2,713) (2,622) 186 (8,194)
(8,008)
Paycheck Protection Program loans 2,811 - 2,811 4,939 -
4,939
Real estate-commercial and construction loans 4,228 (4,120) 108 11,444 (8,978)
2,466
Real estate-residential loans 609 (1,799) (1,190) 1,965 (4,728) (2,763) Loans to individuals (41) (140) (181) (121) (354) (475) Municipal loans and leases (704) 130 (574) (1,292) 434 (858) Lease financings 259 (79) 180 582 (150) 432 Interest and fees on loans and leases 7,253 (8,721) (1,468) 17,703 (21,970) (4,267) Total interest income 7,220 (10,950) (3,730) 17,588 (25,754) (8,166) Interest expense: Interest-bearing checking deposits 231 (441) (210) 537 (750) (213) Money market savings 409 (3,624) (3,215) 1,243 (8,684) (7,441) Regular savings 100 (614) (514) 184 (1,258) (1,074) Time deposits (880) (587) (1,467) (1,632) (582) (2,214) Interest on time and interest-bearing deposits (140) (5,266) (5,406) 332 (11,274) (10,942) Short-term borrowings 113 (110) 3 411 (1,035) (624) Long-term debt 184 (308) (124) 520 (693) (173) Subordinated notes 749 (119) 630 795 (206) 589 Interest on borrowings 1,046 (537) 509 1,726 (1,934) (208) Total interest expense 906 (5,803) (4,897) 2,058 (13,208) (11,150) Net interest income$ 6,314 $ (5,147) $ 1,167 $ 15,530 $ (12,546) $ 2,984 58
-------------------------------------------------------------------------------- Table of Contents Interest Income
Three and nine months ended
Interest income on a tax-equivalent basis for the three months endedSeptember 30, 2020 was$51.2 million , a decrease of$3.7 million , or 6.8%, from the same period in the prior year. Interest income on a tax-equivalent basis for the nine months endedSeptember 30, 2020 was$154.5 million , a decrease of$8.2 million , or 5.0%, from the same period in 2019. The decrease in interest income for the three and nine months endedSeptember 30, 2020 was primarily due to theFederal Reserve interest rate reductions of 75 basis points in the third and fourth quarters of 2019 and 150 basis points in the first quarter of 2020, offset by increases in average gross loans and leases held for investment.
Interest Expense
Three and nine months ended
Interest expense for the three months endedSeptember 30, 2020 was$6.8 million , a decrease of$4.9 million , or 42.0%, from the same period in 2019. Interest expense for the nine months endedSeptember 30, 2020 was$22.8 million , a decrease of$11.2 million , or 32.9%, from the same period in the prior year. Interest expense decreased for the three and nine months endedSeptember 30, 2020 primarily due to theFederal Reserve interest rate decreases in 2019 and 2020, partially offset by growth in average interest-bearing liabilities of$447.1 million and$320.7 million , during the three and nine months endedSeptember 30, 2020 , respectively.
Provision for Credit Losses
The provision for credit losses for the three months endedSeptember 30, 2020 was$3.9 million compared to$1.5 million for the same period in the prior year. Net loan and lease recoveries for the three months endedSeptember 30, 2020 were$35 thousand compared to net loan and lease charge-offs of$468 thousand for the same period in the prior year. The provision for credit losses for the nine months endedSeptember 30, 2020 was$49.5 million compared to$6.3 million for the same period in the prior year. Net loan and lease charge-offs for the nine months endedSeptember 30, 2020 were$4.0 million compared to$2.0 million for the same period in the prior year. Refer to the Executive Overview for discussion of the drivers of provision expense for the three and nine months endedSeptember 30, 2020 and 2019. Refer to Asset Quality for discussion of the drivers for the increase in charge-offs for the three and nine months endedSeptember 30, 2020 and 2019. 59 -------------------------------------------------------------------------------- Table of Contents 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) 2020 2019 Amount Percent 2020 2019 Amount Percent
Trust fee income $ 1,915 $ 1,973 $ (58) (2.9 %) $ 5,729 $ 5,914 $ (185) (3.1 %)
Service charges on deposit
accounts 1,187 1,513 (326) (21.5) 3,474 4,395 (921) (21.0)
Investment advisory commission
and fee income 4,005 4,032 (27) (0.7) 11,800 11,876 (76) (0.6)
Insurance commission and fee
income 3,776 3,877 (101) (2.6) 12,575 12,962 (387) (3.0)
Other service fee income 2,093 2,255 (162) (7.2) 5,451 7,112 (1,661) (23.4)
Bank owned life insurance
income 741 743 (2) (0.3) 2,207 2,438 (231) (9.5)
Net gain on sales of investment
securities 57 33 24 72.7 817 41 776 NM
Net gain on mortgage banking
activities 5,860 1,629 4,231 NM 12,119 2,908 9,211 NM
Other income 2,171 544 1,627 NM 4,017 1,606 2,411 NM
Total noninterest income $ 21,805 $ 16,599 $ 5,206 31.4 % $ 58,189 $ 49,252 $ 8,937 18.1 %
Three and nine months ended
Noninterest income for the three months endedSeptember 30, 2020 was$21.8 million , an increase of$5.2 million , or 31.4%, from the three months endedSeptember 30, 2019 . Noninterest income for the nine months endedSeptember 30, 2020 was$58.2 million , an increase of$8.9 million , or 18.1%, from the nine months endedSeptember 30, 2019 . The net gain on mortgage banking activities increased$4.2 million , or 259.7%, for the three months endedSeptember 30, 2020 and$9.2 million , or 316.7%, for the nine months endedSeptember 30, 2020 , due to an increase in volume and an expansion of margins. Net gain on sales of investment securities increased$776 thousand for the nine months endedSeptember 30, 2020 from the comparable period in the prior year primarily due to a$652 thousand gain on the sale of$58.3 million of agency backed mortgage backed securities in the first quarter of 2020. Other income increased$1.6 million , or 299.1%, for the three months endedSeptember 30, 2020 and$2.4 million , or 150.1%, for the nine months endedSeptember 30, 2020 from the comparable periods in the prior year. Fees on risk participation agreements for interest rate swaps increased$2.2 million for the three months endedSeptember 30, 2020 and$3.4 million for the nine months endedSeptember 30, 2020 from the comparable periods in the prior year, driven by increased customer activity due to the current rate environment. Net gains or losses related to valuations and sales of other real estate owned decreased$323 thousand for the three months endedSeptember 30, 2020 and$268 thousand for the nine months endedSeptember 30, 2020 from the comparable periods in the prior year, primarily due to a$300 thousand valuation adjustment on other real estate owned for a property that is under agreement of sale and is expected to be sold in the fourth quarter of 2020. Gain on sale of small business administration (SBA) loans decreased$52 thousand for the three months endedSeptember 30, 2020 and$346 thousand for the nine months endedSeptember 30, 2020 from the comparable periods in the prior year due to decreased SBA loan sale activity. Equity securities measured at fair value decreased$21 thousand for the three months endedSeptember 30, 2020 and$333 thousand for the nine months endedSeptember 30, 2020 . Service charges on deposit accounts decreased$326 thousand , or 21.5%, for the three months endedSeptember 30, 2020 and$921 thousand , or 21.0%, for the nine months endedSeptember 30, 2020 from the comparable periods in the prior year primarily due to the waiving of certain deposit service charges for customers in response to COVID-19 during the second quarter of 2020 and a decline in customer activity in the third quarter of 2020. Other service fee income decreased$1.7 million , or 23.4%, for the nine months endedSeptember 30, 2020 from the comparable period in the prior year. Mortgage servicing right amortization increased$1.1 million for the nine months endedSeptember 30, 2020 from the comparable period in the prior year driven by the decline in interest rates and their impact on prepayment activity. Additionally, valuation allowance adjustments of$206 thousand during the nine months endedSeptember 30, 2020 were recorded against mortgage servicing right assets due to declines in fair value. Interchange income decreased 60 -------------------------------------------------------------------------------- Table of Contents$320 thousand for the nine months endedSeptember 30, 2020 from the comparable period in the prior year due to decreased customer transaction activity.
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) 2020 2019 Amount Percent 2020 2019 Amount Percent
Salaries, benefits and
commissions $ 24,059 $ 22,758 $ 1,301 5.7 % $ 69,595 $ 66,356 $ 3,239 4.9 %
Net occupancy 2,609 2,475 134 5.4 7,661 7,687 (26) (0.3)
Equipment 972 1,088 (116) (10.7) 2,890 3,143 (253) (8.0)
Data processing 2,862 2,624 238 9.1 8,372 7,765 607 7.8
Professional fees 1,321 1,517 (196) (12.9) 3,902 4,088 (186) (4.5)
Marketing and advertising 463 558 (95) (17.0) 1,400 1,884 (484) (25.7)
Deposit insurance premiums 707 (444) 1,151 NM 1,826 438 1,388 NM
Intangible expenses 283 378 (95) (25.1) 934 1,221 (287) (23.5)
Other expense 5,251 5,313 (62) (1.2) 16,684 16,028 656 4.1
Total noninterest expense
6.2 % $ 113,264 $ 108,610 $ 4,654 4.3 %
Three and nine months ended
Noninterest expense for the three months endedSeptember 30, 2020 was$38.5 million , an increase of$2.3 million , or 6.2%, from the three months endedSeptember 30, 2019 . Noninterest expense for the nine months endedSeptember 30, 2020 was$113.3 million , an increase of$4.7 million , or 4.3%, from the nine months endedSeptember 30, 2019 . Salaries, benefits and commissions increased$1.3 million , or 5.7%, for the three months endedSeptember 30, 2020 and increased$3.2 million , or 4.9%, for the nine months endedSeptember 30, 2020 from the comparable periods in the prior year. The increase for the three and nine months endedSeptember 30, 2020 was attributable to additional staff hired, primarily during 2019, to support revenue generation across all business lines, expansion of our commercial lending groups in the first and second quarters of 2019, annual merit increases and increased variable compensation due to strong mortgage banking activity. Deposit insurance premiums increased$1.2 million , or 259.2%, for the three months endedSeptember 30, 2020 and increased$1.4 million , or 316.9%, for the nine months endedSeptember 30, 2020 from the comparable periods in the prior year primarily due to anFDIC small bank assessment credit of$988 thousand , which was recognized during the third quarter of 2019 and an increased assessment base for 2020 due to asset growth.
Tax Provision
The provision for income taxes for the three months endedSeptember 30, 2020 and 2019 was$5.1 million and$3.8 million , respectively, at effective tax rates of 21.9% and 17.6%, respectively. The provision for income taxes for the nine months endedSeptember 30, 2020 and 2019 was$4.2 million and$11.0 million , respectively, at effective tax rates of 16.7% and 17.9%, respectively. The effective tax rate of 16.7% for the nine months endedSeptember 30, 2020 , was calculated using the annual effective tax rate methodology and reflects the benefits of tax-exempt income from investments in municipal securities and loans and leases. The calculation of the effective tax rate for income taxes for the six months endedJune 30, 2020 was based on the actual effective tax rate for the year-to-date period, given the uncertainty of the impact of COVID-19 and its potential impact on the Corporation's estimate of the annual effective tax rate. 61 --------------------------------------------------------------------------------
Table of Contents Financial Condition Assets
The following table presents assets at the dates indicated:
At September 30, At December 31, Change
(Dollars in thousands) 2020 2019 Amount Percent
Cash and interest-earning deposits $ 387,676 $ 125,128 $ 262,548 NM
Investment securities, net of allowance for
credit losses 368,830 441,599 (72,769) (16.5)
Federal Home Loan Bank , Federal Reserve Bank
and other stock, at cost 29,723 28,254 1,469 5.2
Loans held for sale 14,465 5,504 8,961 NM
Loans and leases held for investment 5,211,856 4,386,836 825,020 18.8
Allowance for credit losses, loans and leases (91,870) (35,331) (56,539) NM
Premises and equipment, net 55,410 56,676 (1,266) (2.2)
Operating lease right-of-use assets 34,573 34,418 155 0.5
Goodwill and other intangibles, net 181,574 182,843 (1,269) (0.7)
Bank owned life insurance 116,985 114,778 2,207 1.9
Accrued interest receivable and other assets 73,609 40,219 33,390 83.0
Total assets $ 6,382,831 $ 5,380,924 $ 1,001,907 18.6 %
Cash and Interest-Earning Deposits
Cash and interest-earning deposits increased$262.5 million , or 209.8%, fromDecember 31, 2019 , primarily due to increased interest earning deposits at theFederal Reserve Bank of$247.5 million .
Total investments securities atSeptember 30, 2020 decreased$72.8 million fromDecember 31, 2019 . Sales of$76.1 million , maturities and pay-downs of$75.5 million , calls of$25.3 million , a provision for credit losses of$693 thousand and net amortization of purchased premiums and discounts of$1.9 million were partially offset by purchases of$103.4 million and increases in the fair value of available-for-sale investment securities of$2.8 million .
Loans and Leases
Gross loans and leases held for investment increased$825.0 million , or 18.8%, fromDecember 31, 2019 . The growth in gross loans and leases held for investment was due to PPP loans outstanding of$501.6 million , and increases in commercial real estate loans partially offset by a decrease in commercial 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. AtSeptember 30, 2020 , nonaccrual loans and leases and accruing troubled debt restructured loans were$30.1 million and had a related allowance for credit losses on loans and leases of$1.1 million . AtDecember 31, 2019 , loans and leases that were considered to be impaired was$38.4 million . The related reserve for loan losses was$2.1 million . Individual reserves have been established based on current facts and management's judgements about the ultimate outcome of these credits. During the first quarter of 2020, three residential real estate loans totaling$710 thousand and two home equity loans totaling$741 62 -------------------------------------------------------------------------------- Table of Contents thousand were returned to accruing status as these loans have maintained a period of repayment performance in accordance with the Corporation's policy. The second quarter of 2020 included a charge-off of$2.7 million and provision for credit losses of$1.3 million related to one commercial real estate loan, which was transferred from nonaccrual loans to other real estate owned. As ofSeptember 30, 2020 , the property was carried at$8.1 million in other real estate owned. The property is under an agreement of sale and is expected to be sold during the fourth quarter of 2020. The amount of the individual reserve needed for these credits could change in future periods subject to changes in facts and judgments related to these credits. Other real estate owned was$8.3 million and$516 thousand atSeptember 30, 2020 andDecember 31, 2019 , respectively. During the nine months endedSeptember 30, 2020 , other real estate owned increased$8.1 million related to the commercial real estate loan discussed above. This increase was offset by a$300 thousand write-down on one property based on an agreement of sale that is expected to be sold in the fourth quarter of 2020. In addition, a residential real estate property with a carrying value of$71 thousand was sold for a gain of$4 thousand .
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 Loans held for investment: Commercial, financial and agricultural $ 3,809 $ 3,442 Real estate-commercial 20,464 27,928 Real estate-construction - 257 Real estate-residential 5,494 6,445 Lease financings 252 506
Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications*
30,019 38,578
Accruing troubled debt restructured loans and lease modifications not included in the above
53 54
Accruing loans and leases 90 days or more past due: Commercial, financial and agricultural
27 20
Real estate-commercial 1,539 -
Real estate-residential 1,255 -
Loans to individuals 23 74
Lease financings 729 49
Total accruing loans and leases, 90 days or more past due 3,573 143
Total nonperforming loans and leases 33,645 38,775
Other real estate owned 8,270 516
Total nonperforming assets $ 41,915 $ 39,291
Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment
0.58 % 0.88 %
Nonperforming loans and leases / loans and leases held for investment
0.65 % 0.88 %
Nonperforming assets / total assets 0.66 % 0.73 %
Allowance for credit losses, loans and leases $ 91,870 $ 35,331
Allowance for credit losses, loans and leases / loans and leases held for investment
1.76 % 0.81 %
Allowance for credit losses, loans and leases / nonaccrual loans and leases held for investment
306.04 % 91.58 %
Allowance for credit losses, loans and leases / nonperforming loans and leases held for investment
273.06 % 91.12 %
* Nonaccrual troubled debt restructured loans and lease
modifications included in nonaccrual loans and leases in the
above table $ 14,206 $ 13,817
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Table of Contents The following table provides additional information on the Corporation's nonaccrual loans held for investment:
At September 30, At December 31,
(Dollars in thousands) 2020 2019
Total nonaccrual loans and leases, including nonaccrual
troubled debt restructured loans and lease modifications
$ 38,578 Nonaccrual loans and leases with partial charge-offs 3,435 1,966
Life-to-date partial charge-offs on nonaccrual loans and leases
1,958 1,320
Specific reserves on individually analyzed loans 1,092 2,108
The Corporation modified certain loans and leases via principal and/or interest
deferrals in accordance with Section 4013 of the CARES Act 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 October 16, 2020 , there
were approximately 165 loan and lease modifications outstanding with principal
balances totaling $191.0 million . As of June 30, 2020 , there were approximately
1,420 loan and lease modifications outstanding with principal balances totaling
$720.1 million .
Table 4-Loan Concentration
The following table provides summarized detail related to outstanding commercial
loan balances, excluding PPP loans, segmented by industry description, 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 of September 30, 2020 :
As of October
(Dollars in thousands) As of September 30, 2020 16, 2020
% of Portfolio $ Balance of Modified Loans as
Total Outstanding % of Commercial with PPP Loans ModifiedLoans a % of Portfolio
Industry Description Balance (excl PPP) Loan Portfolio PPP
(2) (3) (3) (4)
CRE - Retail $ 295,654 7.6 % $ 239 - % $ 45,121 15.3 %
Animal Production 252,752 6.5 706 2.0 135 0.1
CRE - Office 240,521 6.2 - - 1,702 0.7
CRE - 1-4 Family Residential
Investment 237,378 6.1 1,282 0.2 212 0.1
CRE - Multi-family 204,488 5.3 - - 1,281 0.6
Real Estate Lenders, Secondary
Market Financing 189,743 4.9 4,318 27.8 - -
Hotels & Motels (Accommodation) 175,894 4.5 2,407 49.6 56,288 32.0
Nursing and Residential Care
Facilities 160,238 4.1 7,935 26.4 - -
CRE - Industrial / Warehouse 158,356 4.1 139 3.8 - -
CRE - Mixed-Use - Residential 111,613 2.9 - - 15,440 13.8
Specialty Trade Contractors 111,201 2.9 67,508 14.3 - -
Professional, Scientific, and
Technical Services 93,463 2.4 70,163 29.4 63 0.1
CRE - Medical Office 88,557 2.3 - - 9,864 11.1
Homebuilding (tract developers,
remodelers) 85,177 2.2 15,049 5.2 - -
Education 77,676 2.0 15,577 26.7 1,071 1.4
Merchant Wholesalers, Durable
Goods 73,251 1.9 20,726 22.9 - -
Fabricated Metal Product
Manufacturing 65,549 1.7 12,860 3.5 - -
Crop Production 62,689 1.6 289 0.5 - -
Motor Vehicle and Parts Dealers 61,306 1.6 11,623 2.9 - -
Food Services and Drinking Places 59,261 1.5 15,998 25.7 1,298 2.2
Administrative and Support
Services 55,217 1.4 28,943 32.9 - -
Industries with >$50 million in
outstandings $ 2,859,984 73.7 % $ 275,762 11.1 % $ 132,475 4.6 %
Industries with <$50 million in
outstandings $ 1,015,850 26.3 % $ 225,818 17.3 % $ 33,566 3.3 %
Total Commercial Loans $ 3,875,834 100.0 % $ 501,580 12.7 % $ 166,041 4.3 %
$ Balance of Modified Loans as
Consumer Loans and Lease Total Outstanding Modified Loans a % of Portfolio
Financings Balance PPP $ (1) (3) (3) (4)
Real Estate-Residential Secured
for Personal Purpose $ 474,688 - $ 22,937 4.8 %
Real Estate-Home Equity Secured
for Personal Purpose 172,448 - 1,633 0.9
Loans to Individuals 27,771 - 184 0.7
Lease Financings 159,535 - 232 0.1
Total Consumer Loans and Lease
Financings $ 834,442 $ - $ 24,986 3.0 %
Total $ 4,710,276 $ 501,580 $ 191,027 4.1 %
(1) Includes ($9.5) million of net deferred fees.
(2) Represents weighted average percent of the portfolio which received a PPP
loan.
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(3) Loan modifications referenced above were made in accordance with Section
4013 of the CARES Act 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 October 16, 2020 .
(4) Balance of modified loans as of October 16, 2020 as a percentage of
portfolio loans at September 30, 2020 .
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$1.1 million and$955 thousand for the three months endedSeptember 30, 2020 and 2019, respectively. The amortization of intangible assets was$3.3 million and$2.5 million for the nine months endedSeptember 30, 2020 and 2019, respectively. See Note 5 to the Condensed Unaudited Consolidated Financial Statements, "Goodwill and Other Intangible Assets," for a summary of intangible assets atSeptember 30, 2020 andDecember 31, 2019 . The Corporation also has goodwill with a net carrying value of$172.6 million atSeptember 30, 2020 andDecember 31, 2019 , which is deemed to be an indefinite intangible asset and is not amortized. The Corporation completes a goodwill impairment analysis at least 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, 2020 and 2019. 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) 2020 2019 Amount Percent
Deposits $ 5,211,603 $ 4,360,075 $ 851,528 19.5 %
Short-term borrowings 17,681 18,680 (999) (5.3)
Long-term debt 205,010 150,098 54,912 36.6
Subordinated notes 193,413 94,818 98,595 NM
Operating lease liabilities 37,891 37,617 274 0.7
Accrued interest payable and other
liabilities 48,126 44,514 3,612 8.1
Total liabilities $ 5,713,724 $ 4,705,802 $ 1,007,922 21.4 %
Deposits
Total deposits increased
Borrowings
Total borrowings increased$152.5 million , or 57.9%, fromDecember 31, 2019 . Long-term borrowings increased$54.9 million primarily due to an increase in long-term FHLB borrowings to fund future loan growth. Subordinated notes increased from the issuance of$100.0 million aggregate principal amount fixed-to-floating rate subordinated notes onAugust 5, 2020 . Refer to Note 7 for further discussion on the issuance of the 2020 Notes.
Other Liabilities
The Corporation maintains a reserve in other liabilities for off-balance sheet credit exposures that currently are unfunded in categories with historical loss experience. The reserve for these off-balance sheet credits was$3.0 million and$420 thousand atSeptember 30, 2020 andDecember 31, 2019 . Refer to the Executive Overview for discussion of the increase of$2.6 million . 65
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