SUMMIT FINANCIAL GROUP, INC. Management report and analysis of the financial position and operating results INTRODUCTION (Form 10-Q)
The following discussion and analysis focuses on significant changes in our financial condition and results of operations ofSummit Financial Group, Inc. ("Company" or "Summit") and its operating subsidiary,Summit Community Bank ("Summit Community "), for the periods indicated. This discussion and analysis should be read in conjunction with our 2020 audited consolidated financial statements and Annual Report on Form 10-K. The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by us. This Quarterly Report on Form 10-Q contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Words such as "expects", "anticipates", "believes", "estimates" and other similar expressions or future or conditional verbs such as "will", "should", "would" and "could" are intended to identify such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Factors that might cause such a difference include: the effect of the COVID-19 crisis, including the negative impacts and disruptions on the communities we serve, and the domestic and global economy, which may have an adverse effect on our business; current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates,U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; fiscal and monetary policies of theFederal Reserve ; future provisions for credit losses on loans and debt securities; changes in nonperforming assets; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; the successful integration of operations of our acquisitions; changes in banking laws and regulations; changes in tax laws; the impact of technological advances; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. We undertake no obligation to revise these statements following the date of this filing.
PREVIEW
OnApril 24, 2020 , we acquired fourMVB Bank ("MVB") branches in the eastern panhandle ofWest Virginia , onDecember 14, 2020 , we acquiredWinFirst Financial Corp. ("WinFirst") and its subsidiaryWinFirst Bank , headquartered inWinchester, Kentucky and onJuly 12, 2021 we acquired four full-service MVB branch banking offices and two MVB drive-up banking locations in southernWest Virginia . MVB's andWinFirst's results are included in our financial statements from the acquisition dates forward, impacting comparisons to the prior-year periods. Our primary source of income is net interest income from loans and deposits. Business volumes tend to be influenced by the overall economic factors including market interest rates, business spending, and consumer confidence, as well as competitive conditions within the marketplace. Primarily due to our recent acquisitions and organic loan growth, average interest earning assets increased by 21.5% for the first nine months in 2021 compared to the same period of 2020 while our net interest earnings on a tax equivalent basis increased 17.0%. Our tax equivalent net interest margin decreased 13 basis points as our yield on interest earning assets decreased 54 basis points while our cost of interest bearing funds decreased 50 basis points. COVID-19 IMPACTS Overview Our business has been, and continues to be, impacted by the ongoing COVID-19 pandemic. As further discussed in "Results of Operations," the current interest rate environment, borrower credit quality and market volatility, among other factors, continue to impact our performance. Although we are unable to estimate the magnitude, we expect the pandemic and the resulting economic environment will continue to affect our future operating results. Impact on our Operations Summit continues to address the issues arising as a result of COVID-19 as we have implemented various plans, strategies and protocols to protect our employees, maintain services for clients, assure the functional continuity of our operating systems, controls and processes, and mitigate financial risks posed by changing market conditions. While governmental entities have generally eased temporary business closures and all of our offices are now open as normal without restriction and approved Table of
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49 -------------------------------------------------------------------------------- vaccines are being administered throughout our footprint, it remains unknown when, or if, there will be a return to historical norms of economic and social activity. Impact on our Financial Position and Results of Operations
Loan and credit risks
While we have not experienced any material charge-offs related to COVID-19, our allowance for credit losses ACL computation and resulting provision for credit losses are significantly impacted by the estimated potential future economic impact of the COVID-19 crisis. Refer to the Credit Experience section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further details regarding Q3 2021 provision for credit losses. We took actions to identify and assess our COVID-19 related credit exposures by asset classes and borrower types. Depending on the demonstrated need of the client, in certain cases, we either modified to interest only or deferred the full loan payment. Accordingly, the following tables summarize the aggregate balances of loans the Company has modified as result of COVID-19 as ofSeptember 30, 2021 andDecember 31, 2020 classified by types of loans and impacted borrowers. Loan Balances
Amended due to COVID-19 as of
Total Loan
Balance as of Interest Only Payment Total Loans Percentage of
Dollars in thousands 9/30/2021 Payments Deferral Modified Loans Modified
Hospitality industry $ 121,765 $ - $ - $ - - %
Non-owner occupied retail stores 154,120 7,223 - 7,223 4.7 %
Owner-occupied retail stores 163,350 - - - - %
Restaurants 12,200 - - - - %
Oil & gas industry 18,657 - - - - %
Other commercial 1,349,187 - - - - %
Total Commercial Loans 1,819,279 7,223 - 7,223 0.4 %
Residential 1-4 family personal 270,951 - - - - %
Residential 1-4 family rentals 195,914 - - - - %
Home equity 71,496 - - - - %
Loans 538,361 - - - - %
Consumer 32,285 - - - - %
Mortgage warehouse lines 161,627 - - - 0.0 %
Credit cards and overdrafts 2,558 - - - 0.0 %
Total Loans $ 2,554,110 $ 7,223 $ - $ 7,223 0.3 %
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Loan Balances
Amended due to COVID-19 as of
Total Loan
Balance as of Interest Only Payment Total Loans Percentage of
Dollars in thousands 12/31/2020 Payments Deferral Modified Loans Modified
Hospitality industry $ 121,502 $ 40,513 $ 12,930 $ 53,443 44.0 %
Non-owner occupied retail stores 135,405 7,223 447 7,670 5.7 %
Owner-occupied retail stores 126,451 2,317 1,246 3,563 2.8 %
Restaurants 7,481 - - - - %
Oil & gas industry 17,152 - - - - %
Other commercial 1,134,759 12,006 286 12,292 1.1 %
Total Commercial Loans 1,542,750 62,059 14,909 76,968 5.0 %
Residential 1-4 family personal 305,093 159 1,754 1,913 0.6 %
Residential 1-4 family rentals 194,612 148 73 221 0.1 %
Home equity 81,588 - - - - %
Loans 581,293 307 1,827 2,134 0.4 %
Consumer 33,906 48 143 191 0.6 %
Mortgage warehouse lines 251,810 - - - 0.0 %
Credit cards and overdrafts 2,394 - - - 0.0 %
Total Loans $ 2,412,153 $ 62,414 $ 16,879 $ 79,293 3.3 %
Modified loans with deferred payments continue to accrue interest during the
deferral period unless otherwise classified as nonperforming. Consistent with
bank regulatory guidance and Section 4013 of the CARES Act, as modified by the
CAA, borrowers that were otherwise current on loan payments that were granted
COVID-19 related financial hardship payment deferrals will continue to be
reported as current loans throughout the agreed upon deferral periods. COVID-19
related loan modifications are also deemed to be insignificant borrower
concessions, and therefore, such modified loans were not classified as
troubled-debt restructured loans as of September 30, 2021 .
Capital and Liquidity
Our capital management activities, coupled with our historically strong earnings
performance and prudent dividend practices, have allowed us to build and
maintain strong capital reserves. At September 30, 2021 , all of Summit's
regulatory capital ratios significantly exceeded well-capitalized standards.
More specifically, the Company bank subsidiary's Tier 1 Leverage Ratio, a common
measure to evaluate a financial institutions capital strength, was 9.2% at
September 30, 2021 , which is well in excess of the well-capitalized regulatory
minimum of 5.0%.
In addition, management believes the Company's liquidity position is strong. The
Company's bank subsidiary maintains a funding base largely comprised of core
noninterest bearing demand deposit accounts and low cost interest-bearing
transactional deposit accounts with clients that operate or reside within the
footprint of its branch bank network. At September 30, 2021 , the Company's cash
and cash equivalent balances were $211.1 million . In addition, Summit maintains
an available-for-sale debt securities portfolio, comprised primarily of highly
liquid U.S. agency securities, highly-rated municipal securities and U.S.
agency-backed mortgage backed securities, which serves as a ready source of
liquidity. At September 30, 2021 , the Company's available-for-sale debt
securities portfolio totaled $424.7 million , $307.9 million of which was
unpledged as collateral. The Company bank subsidiary's unused borrowing capacity
at the Federal Home Loan Bank of Pittsburgh at September 30, 2021 was $893.2
million , and it maintained $258.1 million of borrowing availability at the
Federal Reserve Bank of Richmond's discount window.
The COVID-19 crisis is expected to continue to impact our financial results, as
well as demand for our services and products during the remainder of 2021 and
potentially beyond. The short and long-term implications of the COVID-19 crisis,
and related monetary and fiscal stimulus measures, on our future revenues,
earnings results, allowance for credit losses, capital reserves and liquidity
are unknown at present.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and follow general
practices within the financial services industry. Application of these
principles requires us to make estimates, assumptions and judgments that affect
the amounts reported in our financial statements and accompanying notes. These
estimates, assumptions and judgments are based on information available as of
the date of the
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-------------------------------------------------------------------------------- financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Our most significant accounting policies are presented in the notes to the consolidated financial statements of our 2020 Annual Report on Form 10-K. These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, we have identified the determination of ACL, fair value measurements and accounting for acquired loans to be the accounting areas that require the most subjective or complex judgments and as such could be most subject to revision as new information becomes available. Refer to Note 7 of the Notes to the Consolidated Financial Statements in the 2020 Form 10-K for a discussion of the methodology we employ regarding the ACL. For additional information regarding critical accounting policies, refer to Critical Accounting Policies section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Form 10-K. There have been no significant changes in our application of critical accounting policies sinceDecember 31, 2020 .
RESULTS OF OPERATIONS
Summary of income
Net income applicable to common shares for the three months endedSeptember 30, 2021 was$12.2 million , or$0.92 per diluted share, compared to$9.6 million , or$0.74 per diluted share for the same period of 2020. Net income applicable to common shares for the nine months endedSeptember 30, 2021 was$32.8 million or$2.52 per diluted share compared to$21.1 million or$1.62 per diluted share for the same period of 2020. The increased earnings for the three months endedSeptember 30, 2021 were primarily attributable to increased net interest income due to our growth and decreased provision for credit losses partially offset by higher salaries, commissions and employee benefits. The increased earnings for the nine months endedSeptember 30, 2021 were primarily attributable to increased net interest income due to our growth, higher bank card revenue and decreased provision for credit losses partially offset by higher salaries, commissions and employee benefits, decreased realized securities gains and higher other operating expenses. Returns on average equity and assets for the first nine months of 2021 were 14.51% and 1.34%, respectively, compared with 10.72% and 1.04% for the same period of 2020. MVB's andWinFirst's results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our 2021 results reflect increased levels of average balances, income and expense as compared to the same periods of 2020 results. At consummation (prior to fair value acquisition adjustments), the MVB eastern panhandle branch transaction consisted primarily of$33.9 million loans acquired and$188.7 million deposits assumed;WinFirst had total assets of$143.4 million ,$122.8 million net loans and deposits of$104.7 million ; and MVB southernWest Virginia branch transaction consisted primarily of$54.4 million loans acquired and$164.0 million deposits assumed.
Net interest income
Net interest income is the principal component of our earnings and represents the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest bearing liabilities can materially impact net interest income.
Q3 2021 compared to Q2 2021
For the quarter endedSeptember 30, 2021 , our net interest income on a fully taxable-equivalent basis increased$1.2 million to$28.3 million compared to$27.1 million for the quarter endJune 30, 2021 . Our taxable-equivalent earnings on interest earning assets increased$935,000 , while the cost of interest bearing liabilities decreased$299,000 (see Tables I and II). For the three months endedSeptember 30, 2021 average interest earning assets increased to$3.23 billion compared to$3.05 billion for the three months endedJune 30, 2021 , while average interest bearing liabilities increased to$2.55 billion for the three months endedSeptember 30, 2021 from$2.41 billion for the three months endedJune 30, 2021 . Table of
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52 -------------------------------------------------------------------------------- For the quarter endedSeptember 30, 2021 , our net interest margin decreased to 3.47%, compared to 3.55% for the linked quarter, as the yields on earning assets declined 15 basis points and the cost of our interest bearing funds decreased by 8 basis points. Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.41% and 3.50% for the three months endedSeptember 30, 2021 andJune 30, 2021 .
Q3 2021 vs. Q3 2020
For the quarter endedSeptember 30, 2021 , our net interest income on a fully taxable-equivalent basis increased$3.2 million to$28.3 million compared to$25.1 million for the quarter endSeptember 30, 2020 . Our taxable-equivalent earnings on interest earning assets increased$1.6 million , while the cost of interest bearing liabilities decreased$1.6 million (see Tables I and II). For the three months endedSeptember 30, 2021 average interest earning assets increased 18.0% to$3.23 billion compared to$2.74 billion for the three months endedSeptember 30, 2020 , while average interest bearing liabilities increased 15.0% from$2.21 billion for the three months endedSeptember 30, 2020 to$2.55 billion for the three months endedSeptember 30, 2021 . For the quarter endedSeptember 30, 2021 , our net interest margin decreased to 3.47%, compared to 3.64% for the same period of 2020, as the yields on earning assets decreased 47 basis points, while the cost of our interest bearing funds decreased by 37 basis points. Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired by merger, Summit's net interest margin was 3.59% for the three months endedSeptember 30, 2020 . Table of
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Table I – Analysis of average balance sheet and net interest income
For the Quarter Ended
September 30, 2021 June 30, 2021 September 30, 2020
Average Earnings/ Yield/ Average Earnings/ Yield/ Average Earnings/ Yield/
Dollars in thousands Balance Expense Rate Balance Expense Rate Balance Expense Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable $ 2,495,880 $ 28,340 4.50 % $ 2,455,757 $ 27,593 4.51 % $ 2,251,722 $ 26,656 4.71 %
Tax-exempt (2) 7,871 96 4.84 % 11,370 132 4.66 % 16,245 191 4.68 %
Securities
Taxable 315,082 1,432 1.80 % 285,092 1,351 1.90 % 261,231 1,445 2.20 %
Tax-exempt (2) 166,285 1,159 2.77 % 147,703 1,078 2.93 % 150,350 1,186 3.17 %
Federal funds sold and interest
bearing deposits with other banks 248,315 118 0.19 % 154,677 56 0.15 % 60,639 57 0.37 %
Total interest earning assets 3,233,433 31,145 3.82 % 3,054,599 30,210 3.97 % 2,740,187 29,535 4.29 %
Noninterest earning assets
Cash & due from banks 20,077 19,095 16,603
Premises and equipment 55,908 53,210 52,329
Property held for sale 12,727 13,631 17,801
Other assets 163,248 156,839 136,777
Allowance for loan losses (33,911) (34,674) (28,144)
Total assets $ 3,451,482 $ 3,262,700 $ 2,935,553
Interest bearing liabilities
Interest bearing demand deposits $ 1,092,392 $ 325 0.12 % $ 995,673 $ 371 0.15 % $ 850,281 $ 380 0.18 %
Savings deposits 691,411 602 0.35 % 665,735 634 0.38 % 588,085 925 0.63 %
Time deposits 571,445 905 0.63 % 562,605 1,131 0.81 % 585,092 2,247 1.53 %
Short-term borrowings 140,146 470 1.33 % 140,146 464 1.33 % 165,555 734 1.76 %
Long-term borrowings and capital
trust securities 49,724 543 4.33 % 49,694 544 4.39 % 23,230 194 3.32 %
Total interest bearing
liabilities 2,545,118 2,845 0.44 % 2,413,853 3,144 0.52 % 2,212,243 4,480 0.81 %
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 547,627 503,116 421,741
Other liabilities 38,789 36,842 33,978
Total liabilities 3,131,534 2,953,811 2,667,962
Shareholders' equity - preferred 14,920 11,254
–
Shareholders' equity - common 305,028 297,635 267,591
Total liabilities and
shareholders' equity $ 3,451,482 $ 3,262,700 $
2 935 553
Net interest earnings$ 28,300 $ 27,066 $ 25,055 Net yield on interest earning assets 3.47 % 3.55 % 3.64 % (1)- For purposes of this table, nonaccrual loans are included in average loan balances. (2)- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21% for all periods presented. The tax equivalent adjustment resulted in an increase in interest income of$263,000 ,$255,000 , and$289,000 for the three months endedSeptember 30, 2021 ,June 30, 2021 , andSeptember 30, 2020 , respectively. Table of
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Table II – Variations in net interest income attributable to rate and volume
For the Quarter Ended For the Quarter Ended
September 30, 2021 vs. June 30, 2021 September 30, 2021 vs. September 30, 2020
Increase (Decrease) Due to Change in: Increase (Decrease) Due to Change in:
Dollars in thousands Volume Rate Net Volume Rate Net
Interest earned on:
Loans
Taxable $ 751 $ (4) $ 747 $ 2,860 $ (1,176) $ 1,684
Tax-exempt (41) 5 (36) (102) 7 (95)
Securities
Taxable 149 (68) 81 272 (285) (13)
Tax-exempt 140 (59) 81 120 (147) (27)
Federal funds sold and
interest bearing deposits with
other banks 41 21 62 102 (41) 61
Total interest earned on
interest earning assets 1,040 (105) 935 3,252 (1,642) 1,610
Interest paid on:
Interest bearing demand
deposits 35 (81) (46) 92 (147) (55)
Savings deposits 26 (58) (32) 143 (466) (323)
Time deposits 19 (245) (226) (52) (1,290) (1,342)
Short-term borrowings - 6 6 (102) (162) (264)
Long-term borrowings and
capital trust securities - (1) (1) 276 73 349
Total interest paid on
interest bearing liabilities 80 (379) (299) 357 (1,992) (1,635)
Net interest income $ 960 $ 274 $ 1,234 $ 2,895 $ 350 $ 3,245
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Table III – Analysis of average balance sheet and net interest income
For the Nine Months Ended
September 30, 2021 September 30, 2020
Average Earnings/ Yield/ Average Earnings/ Yield/
Dollars in thousands Balance Expense Rate Balance Expense Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable $ 2,436,295 $ 83,352 4.57 % $ 2,102,331 $ 77,211 4.91 %
Tax-exempt (2) 10,622 377 4.75 % 16,121 576 4.77 %
Securities
Taxable 288,999 4,079 1.89 % 256,322 4,657 2.43 %
Tax-exempt (2) 153,035 3,328 2.91 % 113,793 2,897 3.4 %
Federal funds sold and interest
bearing deposits with other banks 190,154 241 0.17 % 46,074 215 0.62 %
Total interest earning assets 3,079,105 91,377 3.97 % 2,534,641 85,556 4.51 %
Noninterest earning assets
Cash & due from banks 19,093 15,901
Premises and equipment 54,154 49,655
Property held for sale 13,731 18,423
Other assets 157,137 120,228
Allowance for loan losses (33,765) (25,618)
Total assets $ 3,289,455 $ 2,713,230
Interest bearing liabilities
Interest bearing demand deposits $ 1,016,569 $ 1,090 0.14 % $ 753,384 $ 1,830 0.32 %
Savings deposits 666,642 1,881 0.38 % 516,841 3,462 0.89 %
Time deposits 572,547 3,493 0.82 % 608,551 7,796 1.71 %
Short-term borrowings 140,146 1,403 1.34 % 127,109 1,863 1.96 %
Long-term borrowings and capital
trust securities 49,694 1,632 4.39 % 21,284 600 3.77 %
Total interest bearing liabilities 2,445,598 9,499 0.52 % 2,027,169 15,551 1.02 %
Noninterest bearing liabilities and
shareholders' equity
Demand deposits 501,309 393,128
Other liabilities 37,856 30,741
Total liabilities 2,984,763 2,451,038
Shareholders' equity - preferred 8,780 -
Shareholders' equity - common 295,912 262,192
Total liabilities and shareholders
equity$ 3,289,455 $ 2,713,230 Net interest earnings$ 81,878 $ 70,005 Net yield on interest earning assets 3.56 % 3.69 % (1)- For purposes of this table, nonaccrual loans are included in average loan balances. (2)- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 21%. The tax equivalent adjustment resulted in an increase in interest income of$779,000 and$730,000 for the nine months endedSeptember 30, 2021 and 2020, respectively. Table of
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Table IV – Variations in net interest income attributable to rate and volume
For
the nine months ended
September 30 ,
2021 versus
Increase (Decrease) Due to Change in: Dollars in thousands Volume Rate Net Interest earned on: Loans Taxable $ 11,623$ (5,482) $ 6,141 Tax-exempt (195) (4) (199) Securities Taxable 543 (1,121) (578) Tax-exempt 894 (463) 431 Federal funds sold and interest bearing deposits with other banks 275 (249) 26 Total interest earned on interest earning assets 13,140 (7,319) 5,821 Interest paid on: Interest bearing demand deposits 501 (1,241) (740) Savings deposits 808 (2,389) (1,581) Time deposits (437) (3,866) (4,303) Short-term borrowings 176 (636) (460) Long-term borrowings and capital trust securities 918 114 1,032 Total interest paid on interest bearing liabilities 1,966 (8,018) (6,052) Net interest income $ 11,174 $ 699$ 11,873 Credit Experience
For the purposes of this discussion, nonperforming assets include foreclosed properties, other repossessed assets, and nonperforming loans, which include loans that are 90 days or more past due and continue to accrue interest and unearned loans. Productive TORs are excluded from non-performing loans.
The provision for credit losses represents charges to earnings necessary to maintain an adequate allowance to cover an estimate of the full amount of expected credit losses relative to loans. Our determination of the appropriate level of the allowance is based on an ongoing analysis of credit quality and loss potential in the loan portfolio, change in the composition and risk characteristics of the loan portfolio, and the anticipated influence of national and local economic conditions. The adequacy of the allowance for loan losses is reviewed quarterly and adjustments are made as considered necessary. Our asset quality and mix of new loans required no provision for credit losses for the three months endedSeptember 30, 2021 compared to$3.25 million for the three months endedSeptember 30, 2020 . We recorded$2.50 million and$11.50 million provisions for credit losses (for both funded loans and unfunded commitments) for the first nine months of 2021 and 2020. The following tables summarizes the changes in the various factors that comprise the provisions for credit losses. Table of Contents 57
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Table V – Provision for credit losses
For the Three Months Ended
For the nine months ended
September 30, September 30, Dollars in thousands 2021 2020 2021 2020 Provision for credit losses-loans Due to changes in: Volume, mix and loss experience$ 176 $ 1,060 $ 4,180 $ 309 Reasonable and supportable economic forecasts - - (2,301) 6,063 Individually evaluated credits (2,169) 2,142 (1,842) 3,059 Acquired loans 793 - 793 977 Total provision for loan credit losses (1,200) 3,202 830 10,408 Provision for credit losses-unfunded commitments Due to changes in: Volume, mix and loss experience 1,060 48 2,103 (126) Reasonable and supportable economic forecasts - - (573) 1,137 Individually evaluated credits - - - - Acquired loan commitments 140 - 140 81 Total provision for unfunded commitment credit losses 1,200 48 1,670 1,092 Total provision for credit losses $ -$ 3,250 $ 2,500 $ 11,500 Our reasonable and supportable economic forecasts atSeptember 30, 2021 compared toSeptember 30, 2020 improved markedly as our forecasts for unemployment and GDP now reflect 2021's strengthening economic recovery while early 2020 economic forecasts were extraordinarily negative as result of the COVID-19 pandemic.
TO
We experienced net loan write-offs of
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As illustrated in Table VI below, our non-performing assets have decreased since
year end 2020.
Table VI - Summary of Non-Performing Assets
September 30, December 31,
Dollars in thousands 2021 2020 2020
Accruing loans past due 90 days or more $ 2 $ 2 $ 2
Nonaccrual loans
Commercial 459 553 525
Commercial real estate 4,643 4,313 14,237
Commercial construction and development - - -
Residential construction and development 448 2 235
Residential real estate 5,514 5,104 5,264
Consumer 47 29 72
Other - - -
Total nonaccrual loans 11,111 10,001 20,333
Foreclosed properties
Commercial - - -
Commercial real estate 2,192 2,499 2,581
Commercial construction and development 2,925 4,154 4,154
Residential construction and development 6,711 10,330 7,791
Residential real estate 622 847 1,062
Total foreclosed properties 12,450 17,830 15,588
Repossessed assets - - -
Total nonperforming assets $ 23,563
Total NPLs as a Percentage of Total Loans
0.44 % 0.44 % 0.84 % Total nonperforming assets as a percentage of total assets 0.67 % 0.94 % 1.16 % Allowance for credit losses-loans as a percentage of nonperforming loans 291.64 % 293.45 % 158.57 % Allowance for credit losses-loans as a percentage of period end loans 1.27 % 1.30 % 1.34 % A commercial real estate loan relationship totaling$9.5 million was impacted by the COVID-19 pandemic and on nonaccrual at year end 2020, was restored to full accrual status in third quarter 2021. The following table details the activity regarding our foreclosed properties for the three and nine months endedSeptember 30, 2021 and 2020. Table VII - Foreclosed Property Activity For the Three Months Ended For the Nine Months Ended September 30, September 30, Dollars in thousands 2021 2020 2021 2020 Beginning balance$ 13,170 $ 17,954 $ 15,588 $ 19,276 Acquisitions 190 725 532 888 Improvements - 177 - 1,249 Disposals (645) (470) (2,664) (1,863) Writedowns to fair value (265) (555) (1,006) (1,719) Balance March 31$ 12,450 $ 17,831 $ 12,450 $ 17,831 Refer to Note 7 of the Notes to the Consolidated Financial Statements in the 2020 Form 10-K for a discussion of the methodology information regarding our past due loans, nonaccrual loans, troubled debt restructurings and information regarding our methodology we employ on a quarterly basis to evaluate the overall adequacy of our allowance for credit losses. AtSeptember 30, 2021 andDecember 31, 2020 we had approximately$12.5 million and$15.6 million in foreclosed properties which were obtained as the result of foreclosure proceedings. Although foreclosed property is recorded at fair value less estimated costs to sell, the prices ultimately realized upon their sale may or may not result in us recognizing additional gains or losses. Table of
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Non-interest income
Total noninterest income for the three months and nine months endedSeptember 30, 2021 decreased 26.4% and 0.4%, respectively, compared to the same periods of 2020 principally due to fewer realized securities gains which more than offset the higher bank card revenue due to increased customer usage. We recorded higher mortgage origination revenue for the nine months endedSeptember 30, 2021 compared to 2020 due to higher volumes of secondary market loans driven primarily by historically low interest rates; however, most recently, volumes are lower as mortgage refinance opportunities have become more limited. Further detail regarding noninterest income is reflected in the following table.
Table VIII – Non-interest income
For the Quarter Ended September
For the nine months ended
30, September 30,
Dollars in thousands 2021 2020 2021 2020
Trust and wealth management fees 718 622 2,039 1,870
Mortgage origination revenue 742 780 2,638 1,636
Service charges on deposit accounts 1,338 1,138 3,530 3,283
Bank card revenue 1,509 1,237 4,369 3,257
Realized securities gains (68) 1,522 534 2,560
Bank owned life insurance income 160 795 733 1,334
Other 168 113 413 367
Total $ 4,567 $ 6,207 $ 14,256 $ 14,307
Noninterest Expense
Total noninterest expense increased 11.8% for the three months ended September
30, 2021 compared to the same period of 2020 primarily due to higher salaries,
commissions, and employee benefits and higher equipment expense. Total
noninterest expense increased 11.2% for the nine months ended September 30, 2021
compared to the same period of 2020 primarily due to higher salaries,
commissions, and employee benefits and other expenses that more than offset the
lower foreclosed properties expense. Table IX below shows the breakdown of the
changes.
Table IX- Noninterest Expense
For the Quarter Ended September 30, For the Nine Months Ended September 30,
Change Change
Dollars in thousands 2021 $ % 2020 2021 $ % 2020
Salaries, commissions, and employee
benefits $ 8,745 $ 637
7.9%
7.2 %$ 23,709 Net occupancy expense 1,254 197 18.6 % 1,057 3,559 642 22.0 % 2,917 Equipment expense 1,908 434 29.4 % 1,474 5,088 825 19.4 % 4,263 Professional fees 374 10 2.7 % 364 1,140 (28) (2.4) % 1,168 Advertising and public relations 254 109 75.2 % 145 482 93 23.9 % 389 Amortization of intangibles 390 (22) (5.3) % 412 1,176 (75) (6.0) % 1,251 FDIC premiums 354 34 10.6 % 320 1,119 524 88.1 % 595 Bank card expense 705 116 19.7 % 589 1,964 312 18.9 % 1,652 Foreclosed properties expense 370 (237) (39.0) % 607 1,342 (473)
(26.1)% 1,815
Acquisition-related expenses 273 245 875.0 % 28 1,167 (286) (19.7) % 1,453
Other 2,716 311 12.9 % 2,405 8,365 1,872 28.8 % 6,493
Total $ 17,343 $ 1,834 11.8 % $ 15,509 $ 50,812 $ 5,107 11.2 % $ 45,705
Salaries, commissions, and employee benefits: The increases in these expenses
for the three and nine months ended September 30, 2021 compared to the same
periods of 2020 is primarily due to an increase in number of employees,
resulting from the MVB branches and WinFirst acquisitions, and general merit
raises.
Equipment expense: Equipment expenses have increased primarily due to
depreciation and amortization related to various technological upgrades, both
hardware and software, including interactive teller machine upgrades and recent
acquisitions.
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Foreclosed properties expense: The decrease in foreclosed properties expense, net of gains/losses, for the three and nine months endedSeptember 30, 2021 is primarily due to lower writedowns of foreclosed properties to their estimated fair value.
Costs linked to acquisitions: Costs linked to acquisitions during 2021 are linked to
Other: The increase in other charges for the nine months ended
•Deferred director compensation plan expense of$498,000 in 2021 compared to$190,000 in the comparable period of 2020 as a result of the stock market's overall positive performance during Q1 2021. Under the plan, the directors optionally defer their director fees into a "phantom" investment plan whereby the company recognizes expense or benefit relative to the phantom returns or losses of such investments •During the first nine months of 2021, we incurred$289,000 in fraud/counterfeit losses compared to$99,000 during same period of 2020 •Secondary loan underwriting expenses were$130,000 higher during first nine months of 2021 due to higher volumes of secondary market loans driven primarily by historically low interest rates •Debit card expense increased$207,000 for the nine months endedSeptember 30, 2021 compared to the same period of 2020 due to increased card usage by customers •Internet banking expense increased$216,000 due to increased internet banking activity by clients Income Taxes Our income tax expense for the three months endedSeptember 30, 2021 andSeptember 30, 2020 totaled$3.0 million and$2.6 million , respectively. For the nine months endedSeptember 30, 2021 andSeptember 30, 2020 our income tax expense totaled$8.9 million and$5.3 million , respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters endedSeptember 30, 2021 and 2020 was 19.8% and 21.2%, respectively and for the nine months endedSeptember 30, 2021 and 2020 was 21.1% and 20.1%, respectively. Refer to Note 17 of the accompanying financial statements for further information regarding our income taxes. Table of
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