UNIVEST FINANCIAL CORPORATION (All dollar amounts presented in tables are in thousands, except per share data. "BP" equates to "basis points"; "N/M" 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.) The information contained in this report may contain forward-looking statements, including statements relating to the Corporation and its financial condition and results of operations that involve certain risks, uncertainties and assumptions. The Corporation's actual results may differ materially from those anticipated, expected or projected as discussed in forward-looking statements. A discussion of forward-looking statements and factors that might cause such a difference includes those discussed in Part I, "Forward-Looking Statements," Item 1A. "Risk Factors," as well as those within this Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations and elsewhere in this report.
Critical Accounting Policies
The discussion below outlines the Corporation's critical accounting policies. For further information regarding accounting policies, refer to Note 1, "Summary of Significant Accounting Policies" included in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K. 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. Fair Value Measurement of Investment Securities Available-for-Sale: The Corporation designates its investment securities as held-to-maturity, available-for-sale or trading. Each of these designations affords different treatment on the balance sheet and statement of income for market value changes affecting securities. Should evidence emerge that indicates that management's intent or ability to manage the securities as originally asserted is not supportable, securities in the held-to-maturity or available-for-sale designations may be re-categorized so that adjustments to either the balance sheet or statement of income may be required. Fair values for securities are determined using independent pricing services and market-participating brokers. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flows and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service's evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does have not sufficient verifiable information to value a particular security, the Corporation will utilize valuations from another pricing service. Management has a sufficient understanding of the third party service's valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control. Allowance for Credit Losses on Loan and Leases: The Allowance for Credit Losses (ACL) on loans and leases are provided using techniques that estimate losses on pools of loans and leases that share similar risk characteristics, specifically identify losses on individual loans and leases that do not share similar risk characteristics with others, and estimate the amount of unallocated allowance necessary to account for losses that may be present in the loan and lease portfolio but not yet currently identifiable. The adequacy of these allowances are sensitive to changes in current and forecasted economic conditions that may affect the ability of borrowers to make contractual payments as well as the value of the collateral committed to secure such payments. Management utilizes a discounted cash flow (DCF) model to calculate the present value of the expected cash flows for pools of loans and leases that share similar risk characteristics and compares the results of this calculation to the amortized cost basis to determine its allowance for credit loss balance. The key assumptions used in the model are (1) probability of default, (2) loss given default, (3) prepayment and curtailment rates, (4) reasonable and supportable economic forecasts, (5) forecast reversion period, (6) expected recoveries on charged off loans, and (7) discount rate. Although management believes it uses the best information available to establish the ACL, future adjustments to the ACL may be necessary and the Corporation's results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. While management believes it has established the ACL in conformity with GAAP, our regulators, in reviewing 23
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the loan portfolio, may request us to increase our ACL based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted without uncertainty, the existing ACL may not be adequate or increases may be necessary should the quality of any loans or leases deteriorate as a result of the factors discussed above. Any material increase in the ACL would adversely affect the Corporation's financial condition and results of operations. The Corporation adopted ASU No. 2016-13 effectiveJanuary 1, 2020 . Prior to this adoption, management considered the Reserve for Loan and Lease Losses to be a critical accounting policy. The following paragraph was carried forward from the Annual Report on Form 10-K for the year endedDecember 31, 2019 . Reserve for Loan and Lease Losses: Reserves for loan and lease losses are provided using techniques that specifically identify losses on impaired loans and leases, estimate losses on pools of homogeneous loans and leases, and estimate the amount of unallocated reserve necessary to account for losses that are present in the loan and lease portfolio but not yet currently identifiable. The adequacies of these reserves are sensitive to changes in current economic conditions that may affect the ability of borrowers to make contractual payments as well as the value of the collateral committed to secure such payments. Although management believes it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and the Corporation's results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while management believes it has established the allowance for loan losses in conformity with GAAP, our regulators, in reviewing the loan portfolio, may request us to increase our reserve for loan and lease losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing reserve for loan and lease losses may not be adequate or increases may be necessary should the quality of any loans or leases deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses would adversely affect the Corporation's financial condition and results of operations. Readers of the Corporation's financial statements should be aware that the estimates and assumptions used in the Corporation's current financial statements may need to be updated in future financial presentations for changes in circumstances, business or economic conditions in order to fairly represent the condition of the Corporation at that time.
General
The Corporation earns revenues primarily from the margins and fees generated from the lending and depository services as well as fee-based income from trust, insurance, mortgage banking, treasury management 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:
For the Years Ended December 31, Amount of Change Percent Change
(Dollars in thousands, except
per share data) 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018
Net income $ 46,916 $ 65,719 $ 50,543 $ (18,803) $ 15,176 (28.6) % 30.0 %
Net income per share:
Basic $ 1.60 $ 2.24 $ 1.72 $ (0.64) $ 0.52 (28.6) 30.2
Diluted 1.60 2.24 1.72 (0.64) 0.52 (28.6) 30.2
Return on average assets 0.78 % 1.26 % 1.07 % (48 BP) 19 BP (38.1) 17.8
Return on average equity 7.02 % 10.07 % 8.26 % (305 BP) 181 BP (30.3) 21.9
2020 versus 2019
The Corporation reported net income of $46.9 million , or $1.60 diluted earnings
per share, for 2020 compared to net income of $65.7 million , or $2.24 diluted
earnings per share, for 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
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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 . In conjunction with this adoption, management adjusted certain Financial Statement line item titles to reflect the new accounting standard. Prior period amounts, which are accounted for under previous accounting standards, are presented on the same line item throughout the remainder of this document. During the year endedDecember 31, 2020 , the Corporation recorded CECL related charges of$40.8 million , of which$27.4 million (after-tax charge of$21.6 million ), or$0.74 diluted earnings per share, was attributable to changes in economic related assumptions within the CECL model, primarily related to the effects of the COVID-19 pandemic. The financial results for the year endedDecember 31, 2020 included a$1.4 million ($1.1 million after-tax), or$0.04 diluted earnings per share, restructuring charge associated with the Corporation's financial service center optimization plan announced during the third quarter of 2020 in which the Bank announced its plan to close or relocate eight, or 20%, of its financial centers. The financial results for the year endedDecember 31, 2020 also included a charge of$1.8 million ($1.4 million after-tax), or$0.05 diluted earnings per share, in other expense related to the extinguishment of long-term debt and a$652 thousand , or$0.02 diluted earnings per share, gain on sale of investment securities. During the fourth quarter of 2020, the Corporation modified the vesting criteria for outstanding performance-based restricted stock grants to better reflect the current operating environment. As a result of these modifications, a benefit of$928 thousand ($733 thousand after-tax), or$0.03 diluted earnings per share, was recognized in salaries, benefits and commissions for the year endedDecember 31, 2020 .
2019 versus 2018
The Corporation reported net income of$65.7 million , or$2.24 diluted earnings per share, for 2019 compared to net income of$50.5 million , or$1.72 diluted earnings per share, for 2018. The financial results for the year endedDecember 31, 2019 included aFDIC small bank assessment credit of$1.1 million (after-tax benefit of$871 thousand ) of which$988 thousand was recognized during the third quarter of 2019 and$114 thousand was recognized during the fourth quarter of 2019. TheFDIC credit resulted in a favorable impact to earnings per share of$0.03 during the third quarter and year endedDecember 31, 2019 . In addition, the year endedDecember 31, 2019 included an expense related to a legal settlement with a formerFox Chase Bank customer of$869 thousand (after-tax charge of$687 thousand ), or$0.02 diluted earnings per share, during the fourth quarter of 2019. The financial results for the year endedDecember 31, 2018 included a net provision for loan and lease losses of$10.9 million (after-tax charge of$8.6 million ), or$0.29 diluted earnings per share, related to fraudulent activities by employees of a borrower. A pre-tax charge to the provision for loan and lease losses of$12.7 million (after-tax charge of$10.1 million ), or$0.34 diluted earnings per share, was recognized related to this relationship during the second quarter of 2018 and a recovery of$1.8 million (after-tax recovery of$1.5 million ), which represented$0.05 diluted earnings per share, was included in the fourth quarter of 2018. The year endedDecember 31, 2018 included two additional items: a tax-free bank owned life insurance (BOLI) death benefit of$446 thousand during the second quarter of 2018, which represented$0.02 diluted earnings per share, and restructuring costs related to financial center closures of$451 thousand , net of tax, recognized in the first quarter of 2018, which represented$0.02 diluted earnings per share. 25
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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 years endedDecember 31, 2020 , 2019 and 2018. 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. 2020 versus 2019 Reported net interest income for the year endedDecember 31, 2020 was$174.4 million , an increase of$5.1 million , or 3.0%, from the prior year. Net interest income, on a tax-equivalent basis, for the year endedDecember 31, 2020 was$176.8 million , an increase of$5.0 million , or 2.9%, from the prior year. The increase in reported and tax-equivalent net interest income was primarily due to lower deposit costs and growth in loans partially offset by a decrease in loan and investment yields. The net interest margin on a tax-equivalent basis for the year endedDecember 31, 2020 was 3.16% compared to 3.59% for 2019. The net interest margin decrease was attributable toFederal 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, increased levels of excess liquidity in 2020 driven by strong deposit balance growth and lower-yielding PPP loans, which were originated primarily during the second quarter of 2020.
2019 versus 2018
Reported net interest income for the year endedDecember 31, 2019 was$169.2 million , an increase of$11.2 million , or 7.1%, from the prior year. Net interest income, on a tax-equivalent basis, for the year endedDecember 31, 2019 was$171.8 million , an increase of$11.1 million , or 6.9%, from the prior year. The increase in reported and tax-equivalent net interest income was primarily due to the growth in average loans of 9.8%. The net interest margin on a tax-equivalent basis for the year endedDecember 31, 2019 was 3.59% compared to 3.72% for 2018. The net interest margin decrease was attributable toFederal Reserve interest rate reductions of 75 basis points in the third and fourth quarters of 2019 and increased levels of excess liquidity in 2019 driven by strong deposit balance growth. 26
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Table 1-Average Balances and Interest Rates-Tax-Equivalent Basis
For the Years Ended December 31,
2020 2019 2018
Average Income/ Average Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets:
Interest-earning deposits with other banks$ 274,372 $ 574 0.21 %$ 141,774 $ 2,876 2.03 %$ 56,984 $ 1,101 1.93 %U.S. government obligations 7,132 145 2.03 14,665 254 1.73 22,930 364 1.59 Obligations of states and political subdivisions 23,065 825 3.58 50,360 1,693 3.36 69,842 2,330 3.34 Other debt and equity securities 371,814 7,697 2.07 396,816 10,406 2.62 363,840 9,024 2.48 Federal funds sold and other earning assets 29,726 1,746 5.87 31,446 2,154 6.85 30,786 1,965 6.38 Total interest-earning deposits, investments and other interest-earning assets 706,109 10,987 1.56 635,061 17,383 2.74 544,382 14,784 2.72 Commercial, financial and agricultural loans 817,489 30,657 3.75 815,472 40,496 4.97 793,028 39,156 4.94 Paycheck Protection Program loans 342,920 8,072 2.35 - - - - - - Real estate-commercial and construction loans 2,312,996 94,962 4.11 1,936,073 91,634 4.73 1,689,983 78,498 4.64 Real estate-residential loans 1,007,915 42,047 4.17 950,743 46,031 4.84 870,846 41,270 4.74 Loans to individuals 28,792 1,332 4.63 31,912 1,976 6.19 30,242 1,866 6.17 Municipal loans and leases 283,495 11,857 4.18 331,831 13,262 4.00 316,280 12,049 3.81 Lease financings 95,194 6,498 6.83 82,588 5,904 7.15 76,561 5,514 7.20 Gross loans and leases 4,888,801 195,425 4.00 4,148,619 199,303 4.80 3,776,940 178,353 4.72 Total interest-earning assets 5,594,910 206,412 3.69 4,783,680 216,686 4.53 4,321,322 193,137 4.47 Cash and due from banks 52,000 48,877 45,979 Allowance for credit losses, loans and leases (73,459) (32,389) (25,154) Premises and equipment, net 55,888 58,237 61,006 Operating lease right-of-use asset 34,277 35,712 - Other assets 343,261 330,466 334,619 Total assets$ 6,006,877 $ 5,224,583 $ 4,737,772 Liabilities: Interest-bearing checking deposits$ 692,049 2,173 0.31$ 500,295 2,790 0.56$ 461,676 1,924 0.42 Money market savings 1,113,039 5,551 0.50 995,403 15,843 1.59 764,777 9,137 1.19 Regular savings 874,366 2,057 0.24 802,865 3,660 0.46 798,332 2,357 0.30 Time deposits 572,103 9,835 1.72 677,199 13,276 1.96 601,674 8,768 1.46 Total time and interest-bearing deposits 3,251,557 19,616 0.60 2,975,762 35,569 1.20 2,626,459 22,186 0.84 Short-term borrowings 86,658 327 0.38 56,882 1,012 1.78 144,312 2,420 1.68 Long-term debt 189,410 2,879 1.52 156,366 3,236 2.07 150,032 2,777 1.85 Subordinated notes 134,949 6,762 5.01 94,695 5,044 5.33 94,451 5,043 5.34 Total borrowings 411,017 9,968 2.43 307,943 9,292 3.02 388,795 10,240 2.63 Total interest-bearing liabilities 3,662,574 29,584 0.81 3,283,705 44,861 1.37 3,015,254 32,426 1.08 Noninterest-bearing deposits 1,599,333 1,210,577 1,069,805 Operating lease liabilities 37,557 38,791 - Accrued expenses and other liabilities 39,212 39,057 40,516 Total liabilities 5,338,676 4,572,130 4,125,575 Shareholders' Equity: Common stock 157,784 157,784 157,784 Additional paid-in capital 296,023 293,784 291,148 Retained earnings and other equity 214,394 200,885 163,265 Total shareholders' equity 668,201 652,453 612,197 Total liabilities and shareholders' equity$ 6,006,877 $ 5,224,583 $ 4,737,772 Net interest income$ 176,828 $ 171,825 $ 160,711 Net interest spread 2.88 3.16 3.39 Effect of net interest-free funding sources 0.28 0.43 0.33 Net interest margin 3.16 % 3.59 % 3.72 % Ratio of average interest-earning assets to average interest-bearing liabilities 152.76 % 145.68 % 143.32 % 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 years endedDecember 31, 2020 , 2019 and 2018 have been calculated using the Corporation's federal applicable rate of 21%. 27
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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 year ended
For the Years Ended December 31, 2020 Versus 2019 For the Years Ended December 31, 2019 Versus 2018
Volume Rate Volume Rate
(Dollars in thousands) Change Change Total Change Change Total
Interest income:
Interest-earning deposits with other banks $ 1,459 $ (3,761) $ (2,302) $ 1,715 $ 60 $ 1,775
U.S. government obligations (147) 38 (109) (140) 30 (110)
Obligations of states and political
subdivisions (972) 104 (868) (651) 14 (637)
Other debt and equity securities (625) (2,084) (2,709) 852 530
1,382
Federal Home Loan Bank ,Federal Reserve Bank and other stock (113) (295) (408) 42 147
189
Interest on deposits, investments and other interest-earning assets (398) (5,998) (6,396) 1,818 781
2,599
Commercial, financial and agricultural loans 100 (9,939) (9,839) 1,103 237
1,340
Paycheck Protection Program loans 8,072 - 8,072 - - - Real estate-commercial and construction loans 16,336 (13,008) 3,328 11,592 1,544
13,136
Real estate-residential loans 2,652 (6,636) (3,984) 3,871 890 4,761 Loans to individuals (180) (464) (644) 104 6 110 Municipal loans and leases (1,986) 581 (1,405) 602 611 1,213 Lease financings 868 (274) 594 428 (38) 390 Interest and fees on loans and leases 25,862 (29,740) (3,878) 17,700 3,250 20,950 Total interest income 25,464 (35,738) (10,274) 19,518 4,031 23,549 Interest expense: Interest-bearing checking deposits 871 (1,488) (617) 174 692 866 Money market savings 1,677 (11,969) (10,292) 3,171 3,535 6,706 Regular savings 303 (1,906) (1,603) 14 1,289 1,303 Time deposits (1,924) (1,517) (3,441) 1,210 3,298 4,508 Interest on time and interest-bearing deposits 927 (16,880) (15,953) 4,569 8,814 13,383 Short-term borrowings 363 (1,048) (685) (1,545) 137 (1,408) Long-term debt 604 (961) (357) 120 339 459 Subordinated notes 2,036 (318) 1,718 11 (10) 1 Interest on borrowings 3,003 (2,327) 676 (1,414) 466 (948) Total interest expense 3,930 (19,207) (15,277) 3,155 9,280 12,435 Net interest income$ 21,534 $ (16,531) $ 5,003 $ 16,363 $ (5,249) $ 11,114 28
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Table of Contents Interest Income 2020 versus 2019 Interest income on a tax-equivalent basis for the year endedDecember 31, 2020 was$206.4 million , a decrease of$10.3 million , or 4.7%, from 2019. The decrease in interest income attributable to rate changes of$35.7 million 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 and its impact on loan and investment yields. This decrease was offset by an increase of$17.4 million attributable to volume changes, excluding PPP loans, which was due to increases in average gross loans and leases held for investment, of$397.3 million , excluding PPP loans, and was offset by$8.1 in income from PPP loans. 2019 versus 2018 Interest income on a tax-equivalent basis for the year endedDecember 31, 2019 was$216.7 million , an increase of$23.5 million , or 12.2%, from 2018. The increase in interest income (tax-equivalent) was primarily due to organic loan growth in commercial real estate and residential real estate loans. In addition, loan yields increased during 2019 primarily for commercial real estate and residential real estate loans as theFederal Reserve increased interest rates 100 basis points in 2018 partially offset by a reduction of 75 basis points in interest rates in the third and fourth quarters of 2019. The favorable impact of purchase accounting accretion on interest-earning assets was one basis point for 2019 and 2018. Interest Expense 2020 versus 2019 Interest expense for the year endedDecember 31, 2020 was$29.6 million , a decrease of$15.3 million , or 34.1%, from 2019. The decrease in interest expense was primarily due to theFederal Reserve interest rate decreases in 2019 and 2020 and a$105.1 million decrease in the average balance of time deposits, partially offset by growth of 12.7% in average interest-bearing liabilities during the year endedDecember 31, 2020 , primarily due to the issuance of$100.0 million of subordinated notes inAugust 2020 .
2019 versus 2018
Interest expense for the year endedDecember 31, 2019 was$44.9 million , an increase of$12.4 million , or 38.3%, from 2018. The increase was primarily due to higher deposit costs, which were impacted by theFederal Reserve interest rate increases in 2018 partially offset by the reduction in interest rates in the third and fourth quarters of 2019. In addition, average interest-bearing deposits grew 13.3% during 2019 compared to 2018. The favorable impact of purchase accounting amortization on interest-bearing liabilities was one basis point for 2019, compared to a favorable impact of two basis points for 2018.
Provision for Credit Losses
The provision for credit losses for the years endedDecember 31, 2020 , 2019, and 2018 was$40.8 million ,$8.5 million , and$20.3 million , respectively. Net loan and lease charge-offs for the years endedDecember 31, 2020 , 2019, and 2018 were$4.6 million ,$2.6 million and$12.5 million , respectively. The provision for credit losses in 2020 reflects the adoption of CECL onJanuary 1, 2020 and the impact of the COVID-19 pandemic. The provision for credit losses and loan and lease charge-offs in 2018 included a commercial loan net charge-off of$10.9 million previously discussed in the Executive Overview. 29
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Noninterest Income
The following table presents noninterest income for the years endedDecember 31, 2020 , 2019 and 2018: For the Years Ended December 31, $ Change % Change (Dollars in thousands) 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 Trust fee income$ 7,703 $ 7,826 $ 7,882 $ (123) $ (56) (1.6 %) (0.7 %) Service charges on deposit accounts 4,845 5,946 5,632 (1,101) 314 (18.5) 5.6 Investment advisory commission and fee income 15,944 15,940 15,098 4 842 - 5.6 Insurance commission and fee income 16,087 16,571 15,658 (484) 913 (2.9) 5.8 Other service fee income 7,543 9,341 9,332 (1,798) 9 (19.2) 0.1 Bank owned life insurance income 2,940 3,179 3,174 (239) 5 (7.5) 0.2 Net gain on sales of investment securities 871 54 10 817 44 N/M 440.0 Net gain on mortgage banking activities 16,442 3,946 3,125 12,496 821 316.7 26.3 Other income 5,953 2,619 262 3,334 2,357 127.3 899.6 Total noninterest income$ 78,328 $ 65,422 $ 60,173 $ 12,906 $ 5,249 19.7 % 8.7 % 2020 versus 2019
Noninterest income for the year ended
Other income increased$3.3 million , or 127.3%, for the year endedDecember 31, 2020 . Fees on risk participation agreements for interest rate swaps increased$4.4 million for the year endedDecember 31, 2020 , driven by increased customer activity due to the current rate environment. Gain on sale of small business administration (SBA) loans decreased$482 thousand for the year endedDecember 31, 2020 from the prior year due to decreased SBA loan sale activity. Equity securities measured at fair value decreased$266 thousand for the year endedDecember 31, 2020 from the prior year. Service charges on deposit accounts decreased$1.1 million , or 18.5%, for the year endedDecember 31, 2020 from the prior year due to the waiving of certain deposit service charges for customers in response to COVID-19 during the second quarter of 2020 and reduced customer activity in the third and fourth quarters of 2020. Other service fee income decreased$1.8 million , or 19.2%, for the year endedDecember 31, 2020 from the prior year. Mortgage servicing right amortization increased$1.4 million for the year endedDecember 31, 2020 from the prior year driven by the decline in interest rates and their impact on prepayment activity. Interchange income decreased$308 thousand for the year endedDecember 31, 2020 from the prior year due to decreased customer transaction activity.
2019 versus 2018
Noninterest income for the year endedDecember 31, 2019 was$65.4 million , an increase of$5.2 million , or 8.7%, compared to 2018. The net gain on mortgage banking activities increased$821 thousand , or 26.3%, for the year endedDecember 31, 2019 , primarily due to an increase in mortgage volume partially offset by contraction in margins to remain price competitive. Investment advisory commission and fee income increased$842 thousand , or 5.6%, for the year endedDecember 31, 2019 , primarily due to new client relationships and appreciation of assets under management. Insurance commission and fee income increased$913 thousand , or 5.8%, for the year endedDecember 31, 2019 , primarily due to an increase in premiums for commercial lines and group life and health as well as an increase in contingent commission income of$316 thousand for the year endedDecember 31, 2019 . Service charges on deposit accounts increased$314 thousand , or 5.6%, for the year endedDecember 31, 2019 , primarily due to increased fee income on commercial cash management accounts. Other income increased$2.4 million for the year endedDecember 31, 2019 . Fees on risk participation agreements increased$1.1 million for the year endedDecember 31, 2019 , driven by increased customer activity. Gain on sale of SBA loans increased$462 thousand for the year endedDecember 31, 2019 due to increased SBA loan sale activity. Net loss on valuations and sales of other real estate owned was$28 thousand for the year endedDecember 31, 2019 compared to$626 thousand for the year endedDecember 31, 2018 . 30
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Noninterest Expense
The following table presents noninterest expense for the years endedDecember 31, 2020 , 2019 and 2018: For the Years Ended December 31, $ Change % Change (Dollars in thousands) 2020 2019 2018 2020 to 2019 2019 to 2018 2020 to 2019 2019 to 2018 Salaries, benefits and commissions$ 93,208 $ 88,289 $ 80,488 $ 4,919 $ 7,801 5.6 % 9.7 % Net occupancy 10,358 10,221 10,260 137 (39) 1.3 (0.4) Equipment 3,841 4,170 4,146 (329) 24 (7.9) 0.6 Data processing 11,333 10,450 9,014 883 1,436 8.4 15.9 Professional fees 5,338 5,563 5,391 (225) 172 (4.0) 3.2 Marketing and advertising 1,975 2,594 2,642 (619) (48) (23.9) (1.8) Deposit insurance premiums 2,591 780 1,836 1,811 (1,056) 232.2 (57.5) Intangible expenses 1,216 1,595 2,166 (379) (571) (23.8) (26.4) Restructuring charges 1,439 - 571 1,439 (571) N/M (100.0) Other expense 23,699 22,428 20,725 1,271 1,703 5.7 8.2 Total noninterest expense$ 154,998 $ 146,090 $ 137,239 $ 8,908 $ 8,851 6.1 % 6.4 % 2020 versus 2019 Noninterest expense for the year endedDecember 31, 2020 was$155.0 million , an increase of$8.9 million , or 6.1%, compared to 2019. Salaries, benefits and commissions increased$4.9 million , or 5.6%, for the year endedDecember 31, 2020 . The increases were attributable to additional staff hired, primarily during 2019 as noted below, 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. These increases in salaries, benefits and commissions were offset by the$928 thousand benefit recorded in connection with the modification of the metric issued to evaluate previously issued performance-based restricted stock,$1.3 million of incremental capitalized compensation related to the origination of PPP loans and a$994 thousand reduction in self-insured medical expenses. Deposit insurance premiums increased$1.8 million , or 232.2%, for the year endedDecember 31, 2020 primarily due to anFDIC small bank assessment credit of$1.1 million , of which$988 thousand was recognized during the third quarter of 2019 and$114 thousand was recognized during the fourth quarter of 2019, and an increased assessment base for 2020 due to asset growth. Restructuring charges increased$1.4 million for the year endedDecember 31, 2020 due to the impact of the financial service center optimization plan discussed in the Executive Overview. Other expense increased$1.3 million , or 5.7%, for the year endedDecember 31, 2020 primarily due to charges from the extinguishment of long-term debt.
2019 versus 2018
Noninterest expense for the year endedDecember 31, 2019 was$146.1 million , an increase of$8.8 million , or 6.4%, compared to 2018. Salaries, benefits and commissions increased$7.8 million , or 9.7%, for the year endedDecember 31, 2019 , primarily attributable to additional staff hired to support revenue generation across all business lines, expansion of our commercial lending groups and annual merit increases. During 2019, Univest hired a team of eight commercial lenders and support staff to focus on increasing Univest's presence inWestern Lancaster andYork Counties and hired a team of three commercial lenders to help expand Univest's presence in theNew Jersey suburbs ofPhiladelphia . Data processing expense increased$1.4 million , or 15.9%, for the year endedDecember 31, 2019 , primarily due to continued investments in customer relationship management software and internal infrastructure improvements as well as outsourced data processing solutions for the year endedDecember 31, 2019 . Other expense increased$1.7 million , or 8.2%, primarily due to a charge of$869 thousand related to a legal settlement with a formerFox Chase Bank customer. These increases were partially offset by a decrease in deposit insurance premiums of$1.1 million for the year endedDecember 31, 2019 due to the previously discussedFDIC small bank assessment credit. Intangible expenses decreased by$571 thousand , or 26.4%, for the year endedDecember 31, 2019 due to a run-off of intangible assets from prior acquisitions. In addition, restructuring costs related to financial center closures and staffing rationalization were$571 thousand during the first quarter of 2018. There were no restructuring costs incurred during 2019. 31
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Tax Provision
The provision for income taxes was$10.0 million ,$14.3 million and$10.1 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively, at effective rates of 17.5%, 17.9% and 16.7%, respectively. The effective tax rates reflect the benefits of tax-exempt income from investments in municipal securities and loans and leases. Excluding this impact, the effective tax rate was 21.3% for the year endedDecember 31, 2020 and 2019, respectively. The Corporation's effective income tax rate for the year endedDecember 31, 2018 was favorably impacted by discrete tax benefits and proceeds from BOLI death benefits. Excluding these discrete items, the effective tax rate was 18.3% for the year endedDecember 31, 2018 . The Corporation completed the calculations of provisional items with the completion of the 2017 tax returns. The impact of the completed calculations to the re-measurement of the Corporation's net deferred tax asset resulted in an income tax benefit of$300 thousand , which the Corporation recorded in 2018. Financial Condition ASSETS
The following table presents assets at the dates indicated:
At December 31,
(Dollars in thousands) 2020 2019 $ Change % Change
Cash and interest-earning deposits
75.7 %
Investment securities, net of allowance for
credit losses 373,176 441,599 (68,423) (15.5)
Federal Home Loan Bank , Federal Reserve
Bank and other stock, at cost 28,183 28,254 (71) (0.3)
Loans held for sale 37,039 5,504 31,535 572.9
Loans and leases held for investment 5,306,841 4,386,836 920,005 21.0
Allowance for credit losses, loans and
leases (83,044) (35,331) (47,713) 135.0
Premises and equipment, net 55,636 56,676 (1,040) (1.8)
Operating lease right-of-use asset 34,325 34,418 (93) (0.3)
Goodwill and other intangibles, net 181,425 182,843 (1,418) (0.8)
Bank owned life insurance 117,718 114,778 2,940 2.6
Accrued interest receivable and other
assets 65,339 40,219 25,120 62.5
Total assets $ 6,336,496 $ 5,380,924 $ 955,572 17.8 %
Cash and Interest-Earning Deposits
Cash and interest-earning deposits increased$94.7 million , or 75.7%, fromDecember 31, 2019 , primarily due to increased interest earning deposits at theFederal Reserve Bank of$83.4 million with excess cash from deposit growth, the$100.0 million of subordinated notes issued inAugust 2020 and the sale and maturities of investment securities.Investment Securities Total investment securities atDecember 31, 2020 decreased$68.4 million fromDecember 31, 2019 . Maturities and pay-downs of$112.2 million , sales of$78.7 million , calls of$24.4 million , net amortization of purchased premiums and discounts of$2.8 million and a provision for credit losses of$569 thousand were partially offset by purchases of$147.5 million and increases in the fair value of available-for-sale investment securities of$2.3 million . 32
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Table 3-
The following table shows the carrying amount of investment securities, net of allowance for credit losses, at the dates indicated. Held-to-maturity, available-for-sale and equity security portfolios are combined.
At December 31,
(Dollars in thousands) 2020 2019 2018
13,537 34,595 65,415
Residential mortgage-backed securities 258,422 303,515
287,400
Collateralized mortgage obligations 5,321 2,361 2,888 Corporate bonds 85,619 91,208 93,127 Equity securities 3,279 2,623 2,165 Total investment securities$ 373,176 $ 441,599 $ 473,306
Table 4-
The following table shows the maturity distribution and weighted average yields
of the investment securities at the dates indicated. Expected maturities may
differ from contractual maturities because debt issuers may have the right to
call or prepay obligations without call or prepayment penalties. Therefore, the
stated yield may not be recognized in future periods. Additionally, residential
mortgage-backed securities, which are collateralized by residential mortgage
loans, typically prepay at a rate faster than the stated maturity. Equity
securities have no stated maturity and the current dividend yields may not be
recognized in future periods. The weighted average yield is calculated by
dividing income, which has not been tax effected on tax-exempt obligations,
within each contractual maturity range by the outstanding amount of the related
investment. Held-to-maturity, available-for-sale and equity security portfolios
are combined, net of allowance for credit losses.
At December 31,
(Dollars in thousands) 2020 Amount 2020 Yield 2019 Amount 2019 Yield 2018 Amount 2018 Yield
1 Year or less $ 501 0.78 % $ 6,622 1.81 % $ 28,654 1.58 %
After 1 Year to 5 Years 41,846 2.34 42,491 2.66 46,641 2.18
After 5 Years to 10 Years 72,962 1.27 78,278 2.39 121,533 2.53
After 10 Years 254,588 1.62 311,585 2.79 274,313 2.77
No stated maturity 3,279 0.54 2,623 2.08 2,165 2.63
Total $ 373,176 1.62 % $ 441,599 2.69 % $ 473,306 2.58 %
At
Loans and Leases
Gross loans and leases held for investment atDecember 31, 2020 increased$920.0 million , or 21.0%, fromDecember 31, 2019 . Gross loans and leases held for investment, excluding PPP loans, atDecember 31, 2020 increased$436.2 million , or 9.9% fromDecember 31, 2019 . The growth in gross loans and leases held for investment, excluding PPP loans, was primarily due to increases in real estate-commercial loans. 33
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Table 5-Loan and Lease Portfolio
The following table presents the composition of the loan and lease portfolio at
the dates indicated:
At December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
Commercial, financial and agricultural
483,773 - - - -
Real estate-commercial 2,458,872 2,040,441 1,741,204 1,542,141 1,374,949
Real estate-construction 243,355 232,595 215,513 175,836 174,844
Real estate-residential 1,035,655 987,467 937,457 847,811 747,715
Loans to individuals 27,482 29,883 32,759 28,300 30,373
Lease financings 165,039 149,421 141,956 129,768 134,739
Total loans and leases held for investment,
net of deferred income $ 5,306,841 $
4,386,836
Table 6-Loan and Lease Maturities and Sensitivity to Changes in Interest Rates
The following table presents the maturity and interest rate sensitivity of the
loan and lease portfolio at
Due after One
Due in One Year Year to Five Due After Five (Dollars in thousands)
Total or Less Years Years
Commercial, financial and agricultural $ 892,665 $
607,366
483,773 - 483,773 -
Real estate-commercial 2,458,872 939,490 1,282,094 237,288
Real estate-construction 243,355 138,290 58,324 46,741
Real estate-residential 1,035,655 274,712 376,783 384,160
Loans to individuals 27,482 20,685 4,608 2,189
Lease financings 165,039 54,437 108,380 2,222
Total gross loans and leases held for investment
$ 2,698,308 $
325,466
2,608,533 1,709,514 510,287 388,732
Total gross loans and leases held for investment
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. AtDecember 31, 2020 , nonaccrual loans and leases and accruing troubled debt restructured loans were$31.7 million and had a related allowance for credit losses on loans and leases of$585 thousand . AtDecember 31, 2019 , the recorded investment in 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 judgments 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 the individual reserve needed for these credits could change in future periods subject to changes in facts and judgments related to these credits. The year endedDecember 31, 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 ofDecember 31, 2020 , the property was carried at$7.1 million in other real estate owned. The property is under an agreement of sale and is expected to be sold during the first quarter of 2021. Also during 2020, three residential real 34
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estate loans totaling
Other real estate owned was$7.4 million atDecember 31, 2020 , compared to$516 thousand atDecember 31, 2019 . During the year endedDecember 31, 2020 , other real estate owned increased$7.1 million related to the commercial real estate loan discussed above. This increase was offset by a$300 thousand write-down on one property that was sold in the fourth quarter of 2020. 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. These loans and leases had a combined principal balance of approximately$68.0 million as ofDecember 31, 2020 , which represents approximately 1.4% of the loan portfolio, excluding PPP loans. See Table 8 below for a breakdown of these loans by industry description. 35
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Table 7-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.
At December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
Nonaccrual loans and leases, including
nonaccrual troubled debt restructured loans and
lease modifications*:
Commercial, financial and agricultural
$ 3,365 $ 4,448 $ 5,746 Real estate-commercial 22,739 27,928 18,214 4,285 5,651 Real estate-construction - 257 106 365 - Real estate-residential 5,919 6,445 4,353 3,820 5,983 Lease financings 207 506 170 1,599 536 Total nonaccrual loans and leases, including nonaccrual troubled debt restructured loans and lease modifications* 31,692 38,578 26,208 14,517 17,916 Accruing troubled debt restructured loans and lease modifications not included in the above 53 54 542 11,435 3,252 Accruing loans and leases 90 days or more past due: Commercial, financial and agricultural 50 20 - - - Real estate-commercial 945 - - - - Real estate-residential - - - 310 652 Loans to individuals 185 74 55 195 142 Lease financings 212 49 137 256 193 Total accruing loans and leases, 90 days or more past due 1,392 143 192 761 987 Total nonperforming loans and leases 33,137 38,775 26,942 26,713 22,155 Other real estate owned 7,355 516 1,187 1,843 4,969 Total nonperforming assets$ 40,492 $ 39,291 $ 28,129 $ 28,556 $ 27,124 Nonaccrual loans and leases (including nonaccrual troubled debt restructured loans and lease modifications) / loans and leases held for investment 0.60 % 0.88 % 0.65 % 0.40 % 0.55 % Nonperforming loans and leases / loans and leases held for investment 0.62 % 0.88 % 0.67 % 0.74 % 0.67 % Nonperforming assets / total assets 0.64 % 0.73 % 0.56 % 0.63 % 0.64 %
Allowance for credit losses, loans and leases
1.56 % 0.81 % 0.73 % 0.60 % 0.53 %
Allowance for credit losses, loans and leases /
loans and leases held for investment, excluding
PPP loans 1.72 % 0.81 % 0.73 % 0.60 % 0.53 %
Allowance for credit losses, loans and leases /
nonaccrual loans and leases 262.03 % 91.58 % 112.04 % 148.48 % 97.67 % Allowance for credit losses, loans and leases / nonperforming loans and leases
250.61 % 91.12 % 108.99 % 80.69 % 78.98 %
* Nonaccrual troubled debt restructured loans
and lease modifications included in nonaccrual
loans and leases in the above table $ 14,069 $ 13,817 The following table provides additional information on the Corporation's nonaccrual loans held for investment:
At December 31,
(Dollars in thousands) 2020 2019 2018 2017
Total nonaccrual loans and leases, including
nonaccrual troubled debt restructured loans and
lease modifications $ 31,692 $ 38,578 $ 26,208 $ 14,517
Nonaccrual loans and leases with partial
charge-offs 4,227 1,966 2,210 5,397
Life-to-date partial charge-offs on nonaccrual
loans and leases 2,377 1,320 1,320 4,107
Specific reserves on individually analyzed loans 585 2,108 1,415 131
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Table 8-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 ofDecember 31, 2020 : (Dollars in thousands) As of December 31, 2020 Total Outstanding $ Balance of Balance (excl % of Commercial Loan Modified Loans Modified Loans as a Industry Description PPP) Portfolio PPP$ (1) (2) % of Portfolio (2) CRE - Retail$ 342,910 8.6 %$ 239 $ 3,950 1.2 % Animal Production 263,623 6.6 706 40 - CRE - 1-4 Family Residential Investment 245,022 6.2 1,282 - - CRE - Office 237,752 6.0 - - - CRE - Multi-family 201,995 5.1 - - - Real Estate Lenders, Secondary Market Financing 181,493 4.6 4,318 52 - Hotels & Motels (Accommodation) 175,923 4.4 2,407 24,296 13.8 CRE - Industrial / Warehouse 169,015 4.3 139 - - Nursing and Residential Care Facilities 154,736 3.9 7,935 - - Specialty Trade Contractors 117,301 2.9 67,267 109 0.1 CRE - Mixed-Use - Residential 116,506 2.9 - 8,237 7.1 Professional, Scientific, and Technical Services 92,857 2.3 - - - CRE - Medical Office 92,196 2.3 - - - Homebuilding (tract developers, remodelers) 87,027 2.2 12,931 - - Merchant Wholesalers, Durable Goods 75,241 1.9 17,674 - - Education 68,846 1.7 72,072 2,637 3.8 Crop Production 66,998 1.7 270 - - Motor Vehicle and Parts Dealers 66,516 1.7 11,391 - - Fabricated Metal Product Manufacturing 62,077 1.6 12,760 - - Administrative and Support Services 59,708 1.5 28,814 100 0.2 Food Services and Drinking Places 58,067 1.5 15,971 2,893 5.0 Wood Product Manufacturing 50,079 1.3 3,886 - - Industries with >$50 million in outstandings$ 2,985,888 75.2 %$ 260,062 $ 42,314 1.4 % Industries with <$50 million in outstandings$ 990,450 24.8 %$ 223,711 $ 18,228 1.8 % Total Commercial Loans$ 3,976,338 100.0 %$ 483,773 $ 60,542 1.5 % $ Balance of Total Outstanding Modified Loans Modified Loans as a Consumer Loans and Lease Financings Balance PPP$ (1) (2) % of Portfolio (2) Real Estate-Residential Secured for Personal Purpose$ 487,600 $ -$ 7,444 1.5 Real Estate-Home Equity Secured for Personal Purpose 166,609 - 3 - Loans to Individuals 27,482 - 35 0.1 Lease Financings 165,039 - - - Total Consumer Loans and Lease Financings$ 846,730 $ -$ 7,482 0.9 % Total$ 4,823,068 $ 483,773 $ 68,024 1.4 % (1) Includes($7.7) million of net deferred fees. (2) 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 ofDecember 31, 2020 . 37
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Table 9-Summary of Loan and Lease Loss Experience
The following table presents average loans and leases and summarizes loan and lease loss experience for the periods indicated.
For the Years Ended December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
Average amount of loans and leases
outstanding $ 4,888,801 $
4,148,619
Allowance for credit losses, loans and leases, beginning of period 35,331 29,364 21,555 17,499 17,628 Impact of adoption of ASU 2016-13 12,922 - - - -
Charge-offs:
Commercial, financial and agricultural loans 1,884 1,965 14,655 1,030 4,827 Real estate loans 3,222 736 71 1,798 1,007 Loans to individuals 267 335 353 317 395 Lease financings 526 427 572 3,992 759 Total charge-offs 5,899 3,463 15,651 7,137 6,988 Recoveries: Commercial, financial and agricultural loans 745 367 2,140 801 1,454 Real estate loans 125 226 691 158 260 Loans to individuals 80 75 88 136 133 Lease financings 301 244 231 206 191 Total recoveries 1,251 912 3,150 1,301 2,038 Net charge-offs 4,648 2,551 12,501 5,836 4,950 Provision for credit losses, loans and leases 39,439 8,518 20,310 9,892 4,821 Allowance for credit losses, loans and leases, end of period$ 83,044 $ 35,331 $ 29,364 $ 21,555 $ 17,499 Ratio of net charge-offs to average loans and leases 0.10 % 0.06 % 0.33 % 0.17 % 0.18 % During the second quarter of 2018, the Corporation recorded net charge-offs of$10.9 million related to a commercial loan borrower, see Executive Overview for additional information.
Table 10-Allowance for Credit Losses On Loans and Leases
The following table summarizes the allocation of the allowance for credit losses
on loans and leases, and the percentage of loans and leases in each major loan
category to total loans and leases held for investment at the dates indicated.
At December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
% of Loans % of Loans % of Loans % of Loans
% of Loans to to Total to Total to Total to Total
ACL Total Loans ALLL Loans ALLL Loans ALLL Loans ALLL Loans
Commercial, financial and
agricultural loans $ 13,584 16.8 % $ 8,759 21.6 % $ 7,983 23.4 % $ 6,742 24.8 % $ 7,037 25.1 %
Paycheck Protection
Program loans (1) - 9.1 - - - - - - - -
Real estate loans 67,076 70.5 24,607 74.3 19,338 72.3 13,254 70.8 9,272 69.9
Loans to individuals 533 0.5 470 0.7 484 0.8 373 0.8 364 0.9
Lease financings 1,701 3.1 1,311 3.4 1,288 3.5 1,132 3.6 788 4.1
Unallocated 150 N/A 184
N/A 271 N/A 54 N/A 38 N/A
Total $ 83,044 100.0 % $ 35,331 100.0 % $ 29,364 100.0 % $ 21,555 100.0 % $ 17,499 100.0 %
(1) The Corporation determined that was there was no risk of credit loss on
Paycheck Protection Program loans at December 31, 2020 . The Corporation believes
it originated these loans in accordance with the SBA guidelines and as such are
fully guaranteed by the SBA.
At December 31, 2020 , the allowance for credit losses on individually analyzed
loans was $585 thousand , or 1.9% of the balance of individually analyzed loans
of $31.5 million . At December 31, 2019 , the specific allowance on individually
analyzed
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loans was$2.1 million , or 5.5% of the balance of individually analyzed loans of$38.4 million . AtDecember 31, 2018 , the specific allowance on individually analyzed loans was$1.4 million , or 5.3% of the balance of individually analyzed loans of$26.6 million .
Goodwill and other intangible assets have been recorded on the books of the Corporation in connection with acquisitions. Other intangible assets decreased$1.4 million due to the amortization of intangible assets from prior acquisitions. There was no impairment of goodwill or identifiable intangibles recorded during 2018 through 2020. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Bank Owned Life Insurance
The Bank purchases bank owned life insurance to protect itself against the loss of key employees due to death and to offset or finance the Corporation's future costs and obligations to employees under its benefit plans. Bank owned life insurance increased$2.9 million fromDecember 31, 2019 due to income on the underlying policies.
LIABILITIES
The following table presents liabilities at the dates indicated:
At December 31,
(Dollars in thousands) 2020 2019 $ Change % Change
Deposits $ 5,242,715 $ 4,360,075 $ 882,640 20.2 %
Short-term borrowings 17,906 18,680 (774) (4.1)
Long-term debt 110,000 150,098 (40,098) (26.7)
Subordinated notes 183,515 94,818 88,697 93.5
Operating lease liabilities 37,690 37,617 73 0.2
Accrued interest payable and other
liabilities 52,198 44,514 7,684 17.3
Total liabilities $ 5,644,024 $ 4,705,802 $ 938,222 19.9 %
Deposits
Total deposits increased
Table 11-Deposits
The following table summarizes the average amount of deposits for the periods
indicated:
For the Years Ended December 31,
(Dollars in thousands) 2020 2019 2018
Noninterest-bearing deposits
Interest-bearing checking deposits 692,049 500,295 461,676
Money market savings 1,113,039 995,403 764,777
Regular savings 874,366 802,865 798,332
Time deposits 572,103 677,199 601,674
Total average deposits $ 4,850,890 $ 4,186,339 $ 3,696,264 39
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The following table summarizes the maturities of time deposits with balances of
(Dollars in thousands) At December 31, 2020
Due Three Months or Less $ 89,382
Due Over Three Months to Six Months 42,393
Due Over Six Months to Twelve Months 53,170
Due Over Twelve Months 111,775
Total $ 296,720
Borrowings
Total borrowings increased $47.8 million from December 31, 2019 primarily from
$100.0 million aggregate principal amount fixed-to-floating rate subordinated
notes issued in the third quarter of 2020. This increase was partially offset by
a decrease of $40.1 million in long-term debt and a $10.0 million redemption of
previously issued subordinated notes.
Short-term borrowings consist of overnight borrowings and term borrowings with
an original maturity of one year or less. Short-term borrowings at December 31,
2020 consisted of customer repurchase agreements on an overnight basis totaling
$17.9 million . Long-term debt at December 31, 2020 consisted of Federal Home
Loan bank advances totaling $110.0 million and subordinated notes of $183.5
million . At December 31, 2020 and 2019, the Bank had outstanding short-term
letters of credit with the FHLB totaling $669.7 million and $535.6 million ,
respectively, which were utilized to collateralize public fund deposits.
Table 12-Borrowings
The following table summarizes the Corporation's borrowing activity at the dates
indicated:
Maximum Amount Average Amount Weighted Average
Balance at End Weighted Average Outstanding at Month Outstanding During Interest Rate
(Dollars in thousands) of Year Interest Rate End During the Year the Year During the Year
2020
Short-term borrowings $ 17,906 0.05 % $ 232,551 $ 86,658 0.38 %
Long-term debt 110,000 1.42 210,069 189,410 1.52
Subordinated notes 183,515 4.96 193,481 134,949 5.01
2019
Short-term borrowings $ 18,680 0.05 % $ 206,640 $ 56,882 1.78 %
Long-term debt 150,098 2.04 170,218 156,366 2.07
Subordinated notes 94,818 5.32 94,818 94,695 5.33
2018
Short-term borrowings $ 189,768 2.32 % $ 290,309 $ 144,312 1.68 %
Long-term debt 145,330 2.03 155,782 150,032 1.85
Subordinated notes 94,574 5.33 94,574 94,451 5.34
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SHAREHOLDERS' EQUITY
The following table presents total shareholders' equity at the dates indicated:
At December 31,
(Dollars in thousands) 2020 2019 $ Change % Change
Common stock $ 157,784 $ 157,784 $ - - %
Additional paid-in capital 296,186 294,999 1,187 0.4
Retained earnings 306,899 288,803 18,096 6.3
Accumulated other comprehensive loss (22,144) (21,730) (414) 1.9
Treasury stock (46,253) (44,734) (1,519) 3.4
Total shareholders' equity $ 692,472 $ 675,122 $ 17,350 2.6 %
The increase in shareholder's equity at December 31, 2020 of $17.4 million from
December 31, 2019 was primarily related to an increase in retained earnings of
$18.1 million . Retained earnings was impacted by net income of $46.9 million ,
partially offset by $11.3 million upon adoption of CECL and by $17.5 million due
to cash dividends declared. Treasury stock increased $1.5 million primarily
related to repurchases of $4.4 million of stock offset by $2.6 million of stock
issued under dividend reinvestment and employee stock purchase plans.
Discussion of Segments
The Corporation has three operating segments: Banking, Wealth Management and Insurance. Detailed segment information appears in Note 23, "Segment Reporting" included in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K. The Banking segment reported pre-tax income of$53.2 million in 2020,$74.4 million in 2019 and$56.0 million in 2018. See the section of this MD&A under the heading "Net Interest Income", "Interest Income", "Interest Expense", and "Provision for Credit Losses" for a discussion of the Banking Segment. The Wealth Management segment reported pre-tax income of$7.5 million in 2020 and 2019 and$7.2 million in 2018, which included noninterest income of$23.8 million in 2020,$23.9 million in 2019 and$23.2 million in 2018. Noninterest income decreased slightly from 2019 primarily due to decreased asset values driven by volatile market performance throughout 2020. Noninterest income increased in 2019 from 2018 primarily due to new client relationships and favorable market performance throughout 2019. Wealth Management assets under management and supervision were$4.1 billion as ofDecember 31, 2020 ,$3.8 billion as ofDecember 31, 2019 and$3.3 billion as ofDecember 31, 2018 . The increase in assets under management and supervision as ofDecember 31, 2020 , as compared toDecember 31, 2019 , was primarily due to new client relationships and appreciation of assets under management and supervision. The Insurance segment reported pre-tax income of$4.1 million in 2020,$4.3 million in 2019 and$3.0 million in 2018 which included noninterest income of$16.7 million in 2020,$17.3 million in 2019 and$16.4 million in 2018. The decreases in pre-tax income and noninterest income in 2020 compared to 2019 was primarily due to a decrease in contingent commission income, which was$1.4 million and$1.8 million for the years endedDecember 31, 2020 and 2019, respectively. Noninterest income increased in 2019 compared to 2018 primarily due to an increase in premiums for commercial lines and group life and health as well as an increase in contingent commission income.
Capital Adequacy
Capital guidelines assign minimum capital requirements for categories of assets depending on their assigned risks. The components of risk-based capital for the Corporation are Tier 1 and Tier 2. AtDecember 31, 2020 , the Corporation had a Tier 1 risk-based capital ratio of 10.76% and total risk-based capital ratio of 15.31%. AtDecember 31, 2019 , the Corporation had a Tier 1 capital ratio of 11.03% and total risk-based capital ratio of 13.78%. The Corporation continues to be in the "well-capitalized" category under regulatory standards. Details on the capital ratios can be found in Note 21, "Regulatory Matters," included in the Notes to the Consolidated Financial Statements under Item 8 of this Form 10-K along with a discussion on dividend and other restrictions. 41
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Asset/Liability Management
The primary functions of Asset/Liability Management are to assure adequate earnings, capital and liquidity while maintaining an appropriate balance of interest-earning assets and interest-bearing liabilities. Management's objective with regard to interest rate risk is to understand the Corporation's sensitivity to changes in interest rates and develop and implement strategies to minimize volatility while maximizing net interest income. The Corporation uses gap analysis and earnings at risk simulation modeling to quantify exposure to interest rate risk. The Corporation uses the gap analysis to identify and monitor long-term rate exposure and uses a simulation model to measure short-term rate exposure. The Corporation runs various earnings simulation scenarios to quantify the impact of declining or rising interest rates on net interest income over a one-year and two-year horizon. The simulation uses expected cash flows and repricing characteristics for all financial instruments at a point in time and incorporates company-developed, market-based assumptions regarding growth, pricing, and optionality such as prepayment speeds. As interest rates increase, fixed-rate assets that banks hold tend to decrease in value; conversely, as interest rates decline, fixed-rate assets that banks hold tend to increase in value.
Interest Rate Sensitivity
Interest rate sensitivity is a function of the repricing characteristics of the
Corporation's assets and liabilities. Minimizing the balance sheet's maturity
and repricing risk is a continual focus in a changing interest rate environment.
The Corporation uses a variety of techniques to assist in identifying the
potential range of risk, including a maturity/repricing gap analysis as well as
an Earnings at Risk analysis under various interest rate scenarios.
The gap analysis identifies interest rate risk by identifying repricing gaps in
the Corporation's balance sheet. All assets and liabilities are modeled to
reflect some level of behavioral optionality, such as prepayments on loans,
early call features on investments or potential pricing change and/or product
change to interest bearing deposits. The Corporation projects all non-interest
bearing deposits to be considered non-rate sensitive. These assumptions are
based upon historic behavior; however, they are inherently uncertain and thus
cannot precisely predict the impact of changes in interest rates. While actual
results will differ from simulated results due to customer behavioral change
and/or market and regulatory influences, the following models are important
tools to guide management.
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Table 13-Interest Rate Sensitivity Gap Analysis
The following table presents the Corporation's gap analysis at
Within Three After Three Months After One Year Non-Rate
(Dollars in thousands) Months to Twelve Months to Five Years Over Five Years Sensitive Total
Assets:
Cash and due from banks $ - $ - $ - $ - $ 62,555 $ 62,555
Interest-earning deposits with other
banks 157,303 - - - - 157,303
Investment securities, net of allowance for credit losses 81,319 59,600 151,495 77,380 3,382
373,176
Federal Home Loan Bank ,Federal Reserve Bank and other stock, at cost - - - - 28,183 28,183 Loans held for sale 37,039 - - - - 37,039 Loans and leases, net of allowance for credit losses* 3,275,565 346,403 1,362,726 322,147 (83,044) 5,223,797 Other assets - - - - 454,443 454,443 Total assets$ 3,551,226 $ 406,003 $ 1,514,221 $ 399,527 $ 465,519 $ 6,336,496 Liabilities and shareholders' equity: Noninterest-bearing deposits $ - $ - $ - $ -$ 1,690,663 $ 1,690,663 Interest-bearing demand deposits 2,070,183 - - - - 2,070,183 Savings deposits 918,094 - - - - 918,094 Time deposits 143,884 172,138 244,429 3,324 - 563,775 Borrowings 71,421 45,000 195,000 - - 311,421 Other liabilities - - - - 89,888 89,888 Shareholders' equity - - - - 692,472 692,472 Total liabilities and shareholders' equity$ 3,203,582 $ 217,138 $ 439,429 $ 3,324$ 2,473,023 $ 6,336,496 Interest rate swaps$ 15,644 $ - $ - $ - $ - Incremental gap$ 363,288 $ 188,865 $ 1,074,792 $ 396,203 $ (2,007,504) Cumulative gap$ 363,288 $ 552,153 $ 1,626,945 $ 2,023,148 Cumulative gap as a percentage of interest-earning assets 6.1 % 9.3 % 27.5 % 34.3 %
*PPP loans are included in the "Within Three Months" category, assuming full forgiveness.
The table above indicates that the Corporation should anticipate a greater amount of assets repricing than liabilities in the next twelve months. However, this table and analysis is limited as it does not take into account the magnitude of repricing due to rate changes.
Table 14-Net Interest Income - Summary of Earnings at Risk Simulation
Management also performs a simulation of net interest income to measure interest
rate exposure. The following table demonstrates the anticipated impact of an
instantaneous and parallel interest rate shift, or "shock," to the yield curve
on the Corporation's net interest income over the next twelve months. This
simulation incorporates the same assumptions noted above and assumes a static
balance sheet with no incremental growth in interest-earning assets or
interest-bearing liabilities over the next twelve months.
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The changes to net interest income are shown in the below table atDecember 31, 2020 . The results suggest the Corporation's year-end balance sheet is slightly asset sensitive as net interest income is projected to increase in a rising rate environment; however, actual results could be materially different than modeled, due to numerous factors, including interest rates earned on new loans and investments as well as rates paid on new and existing deposits and new borrowings. The changes to net interest income shown below are in compliance with the Corporation's policy guidelines. Estimated Change in Net Interest Income Over Next 12 Months (Dollars in thousands) Amount Percent Rate shock - Change in interest rates +300 basis points$ 41,757 25.10 % +200 basis points 28,983 17.42 +100 basis points 15,545 9.34 -100 basis points (3,683) (2.21) Credit Risk Originating loans exposes the Corporation to credit risk, which is the risk that the principal balance of a loan and any related interest will not be collected due to the inability of the borrower to repay the loan. The Corporation manages credit risk in the loan portfolio through adherence to consistent standards, guidelines and limitations established by the Board of Directors. Written loan policies establish underwriting standards, lending limits and other standards or limits as deemed necessary and prudent. While the Corporation has strict underwriting, review, and monitoring procedures in place, these procedures cannot eliminate all of the risks related to these lending activities.
The Corporation's loan review department conducts ongoing, independent reviews of the lending process to ensure adherence to established policies and procedures, monitors compliance with applicable laws and regulations and provides objective measurement of the risk inherent in the loan portfolio.
The Corporation focuses on both assessing the borrower's capacity and willingness to repay and obtaining sufficient collateral. Commercial, financial and agricultural loans are generally secured by the borrower's assets and by personal guarantees. Commercial real estate, construction and residential real estate secured for business purposes loans are originated primarily within thePennsylvania ,Maryland ,Delaware andNew Jersey market areas at prudent loan-to-value ratios and are often supported by a guarantee of the borrowers. Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that any credit concentrations by borrower or industry are identified and managed. See "Risk Factors" included herein under Item 1A for additional information on lending risk related to commercial loans. The Corporation originates fixed-rate and adjustable-rate residential mortgage loans that are secured by the underlying 1- to 4-family residential properties for personal purposes. Credit risk exposure in this area of lending is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio are generally insured by private mortgage insurance. Credit risk in the consumer loan portfolio is controlled by strict adherence to underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values. In the home equity loan portfolio, combined loan-to-value ratios are generally limited to 80%, but may be increased to 85% for the Corporation's strongest profile borrowers. Other credit considerations and compensating factors may warrant higher combined loan-to-value ratios. These loans are included within the portfolio of loans to individuals. The primary risks that are involved with lease financing receivables are credit underwriting and borrower industry concentrations. The Corporation has strict underwriting, review, and monitoring procedures in place to mitigate this risk. Risk also lies in the residual value of the underlying equipment. Residual values are subject to judgments as to the value of the underlying equipment that can be affected by changes in economic and market conditions and the financial viability of the residual guarantors and insurers. To the extent not guaranteed or assumed by a third party, or otherwise insured against, the Corporation bears the risk of ownership of the leased assets. This includes the risk that the actual value of the leased assets at the end of the lease term will be less than the residual value. The Corporation greatly reduces this risk primarily by using$1.00 buyout leases, in which the entire cost of the leased equipment is included in the contractual payments, leaving no residual payment at the end of the lease term for the majority of the lease portfolio. 44
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The Corporation closely monitors delinquencies as another means of maintaining asset quality. Collection efforts begin after a loan payment is missed, by attempting to contact all borrowers. If collection attempts fail, the Corporation will proceed to gain control of all collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all monies owed to the Corporation.
Liquidity
The Corporation, in its role as a financial intermediary, is exposed to certain liquidity risks. Liquidity refers to the Corporation's ability to ensure that sufficient cash flow and liquid assets are available to satisfy demand for loans, deposit withdrawals, repayment of borrowings, certificates of deposit at maturity, operating expense and capital expenditures. The Corporation manages liquidity risk by measuring and monitoring liquidity sources and estimated funding needs on a daily basis. The Corporation has a contingency funding plan in place to address liquidity needs in the event of an institution-specific or a systemic financial crisis. Sources of Funds Core deposits continue to be the largest significant funding source for the Corporation. These deposits are primarily generated from individuals, businesses, municipalities and non-profit customers located in our primary service areas. The Corporation faces increased competition for these deposits from a large array of financial market participants, including banks, credit unions, savings institutions, mutual funds, security dealers and others. As part of its diversified funding strategy, the Corporation also utilizes a mix of short-term and long-term wholesale funding providers. Wholesale funding includes federal funds purchases from correspondent banks, secured borrowing lines from theFederal Home Loan Bank of Pittsburgh , theFederal Reserve Bank of Philadelphia and, at times, brokered deposits and other similar sources.
Cash Requirements, Contractual Obligations and Commitments
The Corporation has cash requirements for various financial obligations, including contractual obligations and commitments that require cash payments. The following contractual obligations and commitments table presents, atDecember 31, 2020 , significant fixed and determinable contractual obligations and commitments to third parties. The most significant contractual obligation, in both the under and over one-year time period, is for extensions of credit and for the Bank to repay certificates of deposit and long-term borrowings. The Bank anticipates meeting these obligations by continuing to provide convenient depository and cash management services through its financial center network, thereby replacing these contractual obligations with similar fund sources at rates that are competitive in our market. The Bank will also use borrowings and brokered deposits to meet its obligations. Commitments to extend credit, performance letters of credit, standby letters of credit, and other letters of credit are financial instruments issued by the Corporation to accommodate the financial needs of customers. The Corporation uses the same credit policies in issuing these financial instruments as it does for on-balance sheet financial instruments, including obtaining collateral when management's credit assessment of the customer deems it necessary. These financial instruments generally have fixed expiration dates and historically most of these financial instruments expire without being drawn upon. The Corporation maintains a reserve for off-balance sheet credit exposures that are currently unfunded. Commitments to extend credit are agreements to lend to a customer if there is no violation of any condition established in the contract. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. Performance letters of credit and standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. The Corporation's exposure to credit loss is essentially the same as the risk involved in extending loans to customers. 45
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Table 15-Contractual Obligations and Commitments
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows, including interest payable, atDecember 31, 2020 . The contractual amounts to be paid on variable rate obligations are affected by changes in the market interest rates. Future changes in the market interest rates could materially affect the contractual amounts to be paid. The table also shows the amounts and expected maturities of significant commitments atDecember 31, 2020 . These commitments do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon. Commitments to extend credit and the repayment of maturing time deposits are the Bank's most significant commitment in the under one-year time period. Payments Due by Period Due after One Due after Three Due in One Year to Three Years to Five Due in Over (Dollars in thousands) Total Year or Less Years Years Five Years Short-term borrowings$ 17,906 $ 17,906 $ - $ - $ - Long-term debt and interest 113,615 16,300 37,209 60,106 - Subordinated notes (a) 251,277 8,288 17,507 17,348 208,134 Time deposits (b) 578,635 320,542 218,945 35,547 3,601 Operating leases 50,689 3,866 7,692 7,288 31,843 Standby, performance and other letters of credit 70,550 55,713 14,837 - - Commitments to extend credit (c) 1,443,141 446,916 215,618 73,892 706,715 Net asset/liability derivative loan commitments (d) 2,576 2,576 - - - Other long-term obligations (e) 12,979 7,831 4,846 297 5 Total contractual obligations$ 2,541,368 $ 879,938 $ 516,654 $ 194,478 $ 950,298
Notes: (a) Includes interest for fixed and variable rate components. As specified in the
note agreements, the Corporation has the option to redeem the Notes in whole or
in part at a redemption price equal to 100% of the principal amount of the
redeemed Notes, plus accrued and unpaid interest to the date of the redemption.
Includes interest on both fixed and variable rate obligations. The interest
(b) expense is based upon the fourth quarter average interest rate.
Includes both revolving and straight lines of credit. Revolving lines are
(c) reported in the "Due in One Year or Less" category.
(d) Includes the fair value of these contractual arrangements at
Represents obligations to the Corporation's third-party data processing provider
(e) and other vendors.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 1, "Summary of Significant Accounting Policies" of this Form 10-K.
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