SUMMIT FINANCIAL 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.
OVERVIEW
OnJanuary 1, 2020 , we acquiredCornerstone Financial Service, Inc. ("Cornerstone") and its subsidiary,Cornerstone Bank, Inc. , headquartered inWest Union, West Virginia , onApril 24, 2020 , we acquired fourMVB Bank ("MVB") branches in the eastern panhandle ofWest Virginia and onDecember 14, 2020 , we acquiredWinFirst Financial Corp. ("WinFirst") and its subsidiaryWinFirst Bank , headquartered inWinchester, Kentucky . Cornerstone's, 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 2020 acquisitions and organic loan growth, average interest earning assets increased by 25.5% for the first three months in 2021 compared to the same period of 2020 while our net interest earnings on a tax equivalent basis increased 22.6%. Our tax equivalent net interest margin decreased 12 basis points as our yield on interest earning assets decreased 70 basis points while our cost of interest bearing funds decreased 75 basis points.
COVID-19 IMPACTS
Overview
Our business has been, and continues to be, impacted by the ongoing COVID-19 pandemic. InMarch 2020 , COVID-19 was declared a pandemic by theWorld Health Organization and a national emergency by the President ofthe United States . Efforts to limit the spread of COVID-19 have led to shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts ofthe United States and, in particular, the markets in which we operate. As the current pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, its ultimate geographic spread; its severity; the duration of the outbreak; the impact to our clients, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). COVID-19 has negatively affected, and is expected to continue to negatively affect, our business, financial position and operating results. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been trending more positively. Table of
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Impact on our Operations
The resulting closures of non-essential businesses and related economic
disruption has impacted our operations as well as the operations of our clients.
In West Virginia and Virginia , financial services have been identified as
essential services, and accordingly, our business remains open, with appropriate
safety protocols implemented. To address the issues arising as a result of
COVID-19, 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. In order to protect employees and assure
workforce continuity and operational redundancy, we imposed business travel
restrictions, enhanced our sanitizing protocols within our facilities and
physically separated, to the extent possible, our critical operations workforce
that cannot work remotely.
Impact on our Financial Position and Results of Operations
Lending and Credit Risks
While we have not yet 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. Due to deteriorated forecasted economic scenarios since the pandemic was declared inMarch 2020 , we necessarily increased our ACLL last year. Should economic conditions worsen, we could experience further increases in our ACLL and record additional credit loss expense. Refer to the Credit Experience section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further details regarding Q1 2021 provision for credit losses. We have taken 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 are either modifying to interest only or deferring the full loan payment. Accordingly, the following tables summarize the aggregate balances of loans the Company has modified as result of COVID-19 as ofMarch 31, 2021 andDecember 31, 2020 classified by types of loans and impacted borrowers. Loan Balances
Modified Due to COVID-19 as of
Total Loan
Balance as of Interest Only Payment Total Loans Percentage of
Dollars in thousands 3/31/2021 Payments Deferral Modified Loans Modified
Hospitality industry $ 123,830 $ 14,546 $ 9,154 $ 23,700 19.1 %
Non-owner occupied retail stores 146,837 7,223 - 7,223 4.9 %
Owner-occupied retail stores 143,246 - - - - %
Restaurants 8,192 - - - - %
Oil & gas industry 16,831 - - - - %
Other commercial 1,235,203 - 581 581 - %
Total Commercial Loans 1,674,139 21,769 9,735 31,504 1.9 %
Residential 1-4 family personal 292,846 12 2,282 2,294 0.8 %
Residential 1-4 family rentals 184,108 - - - - %
Home equity 77,684 - - - - %
Loans 554,638 12 2,282 2,294 0.4 %
Consumer 32,924 - 76 76 0.2 %
Mortgage warehouse lines 187,995 - - - 0.0 %
Credit cards and overdrafts 2,375 - - - 0.0 %
Total Loans $ 2,452,071 $ 21,781 $ 12,093 $ 33,874 1.4 %
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Loan Balances
Modified 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 will 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 March 31, 2021 . We anticipate that
COVID-19 related loan modifications may continue throughout 2021.
Our loan interest income could be reduced due to COVID-19. While interest and
fees will still accrue to income, through normal accounting, should eventual
credit losses on these deferred payments emerge, interest income and fees
accrued would need to be reversed. In such a scenario, interest income in future
periods could be negatively impacted. At this time, we are unable to project the
materiality of such an impact.
Capital and Liquidity
Although there is a high degree of uncertainty around the magnitude and duration
of the economic impact of the COVID-19 pandemic, management believes that our
financial position, including high levels of capital and liquidity, will allow
us to successfully endure the negative economic impacts of the crisis. 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 March 31, 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 9.3% at March
31, 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 March 31, 2021 , the Company's cash and
cash equivalent balances were $176.6 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 March 31, 2020 , the Company's available-for-sale debt securities
portfolio totaled $311.4 million , $209.5 million of which was unpledged as
collateral. The Company bank subsidiary's unused borrowing capacity at the
Federal Home Loan Bank of Pittsburgh at March 31, 2021 was $833.6 million , and
it maintained $176.3 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.
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CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe 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 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
Earnings Summary
Net income for the three months endedMarch 31, 2021 was$10.4 million , or$0.80 per diluted share, compared to$4.5 million , or$0.35 per diluted share for the same period of 2020. Earnings for the three months endedMarch 31, 2021 were positively impacted by decreased provision for credit losses, higher net interest income, and higher mortgage origination revenue partially offset by decreased realized securities gains, higher salaries, commissions and employee benefits and higher other operating expenses. Returns on average equity and assets for the first three months of 2021 were 14.51% and 1.31%, respectively, compared with 6.92% and 0.73% for the same period of 2020. Cornerstone's, 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), Cornerstone had total assets of$195.0 million , net loans of$39.8 million , and deposits of$173.0 million ; the MVB branch transaction consisted primarily of$35.1 million loans acquired and$188.1 million deposits assumed; andWinFirst had total assets of$143.4 million ,$123.8 million net loans and deposits of$103.6 million .
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.
Q1 2021 compared to Q4 2020
For the quarter endedMarch 31, 2021 , our net interest income on a fully taxable-equivalent basis increased$41,000 to$26.5 million compared to$26.5 million for the quarter endDecember 31, 2020 . Our taxable-equivalent earnings on interest earning assets decreased$422,000 , while the cost of interest bearing liabilities decreased$463,000 (see Tables I and II). For the three months endedMarch 31, 2021 average interest earning assets increased to$2.95 billion compared to$2.80 billion for the three months endedDecember 31, 2020 , while average interest bearing liabilities increased to$2.38 billion for the three months endedMarch 31, 2021 from$2.26 billion for the three months endedDecember 31, 2020 . Table of
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For the quarter ended March 31, 2021 , our net interest margin decreased to
3.65%, compared to 3.76% for the linked quarter, as the yields on earning assets
declined 20 basis points and the cost of our interest bearing funds decreased by
10 basis points. At acquisition, Cornerstone's, MVB's and WinFirst's deposit
costs were significantly lower than Summit's cost of deposits, thus positively
impacting our overall cost of funds.
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 3.60%
and 3.70% for the three months ended March 31, 2021 and December 31, 2020 .
Q1 2021 compared to Q1 2020
For the quarter endedMarch 31, 2021 , our net interest income on a fully taxable-equivalent basis increased$4.9 million to$26.5 million compared to$21.6 million for the quarter endMarch 31, 2020 . Our taxable-equivalent earnings on interest earning assets increased$2.2 million , while the cost of interest bearing liabilities decreased$2.7 million (see Tables I and II). For the three months endedMarch 31, 2021 average interest earning assets increased 27.3% to$2.95 billion compared to$2.32 billion for the three months endedMarch 31, 2020 , while average interest bearing liabilities increased 28.6% from$1.85 billion for the three months endedMarch 31, 2020 to$2.38 billion for the three months endedMarch 31, 2021 . For the quarter endedMarch 31, 2021 , our net interest margin decreased to 3.65%, compared to 3.76% for the same period of 2020, as the yields on earning assets decreased 70 basis points, while the cost of our interest bearing funds decreased by 75 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 3.70% for the three months endedMarch 31, 2020 . Table of
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--------------------------------------------------------------------------------Table I - Average Balance Sheet and Net Interest Income Analysis
For the Quarter Ended
March 31, 2021 December 31, 2020 March 31, 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 $ 2,355,705 $ 27,419 4.72 % $ 2,292,797 $ 27,774 4.82 % $ 1,935,473 $ 25,089 5.21 %
Tax-exempt (2) 12,679 151 4.83 % 13,062 156 4.75 % 14,873 185 5.00 %
Securities
Taxable 266,289 1,295 1.97 % 258,594 1,341 2.06 % 258,889 1,757 2.73 %
Tax-exempt (2) 144,880 1,091 3.05 % 147,979 1,122 3.02 % 70,239 699 4 %
Federal funds sold and interest
bearing deposits with other banks 166,531 67 0.16 % 87,151 51 0.23 % 35,648 98 1.11 %
Total interest earning assets 2,946,084 30,023 4.13 % 2,799,583 30,444 4.33 % 2,315,122 27,828 4.83 %
Noninterest earning assets
Cash & due from banks 17,961 16,846 14,422
Premises and equipment 53,317 52,688 46,151
Property held for sale 14,859 17,569 19,354
Other assets 152,484 139,867 101,492
Allowance for loan losses (32,706) (30,778) (20,452)
Total assets $ 3,151,999 $ 2,995,775 $ 2,476,089
Interest bearing liabilities
Interest bearing demand deposits $ 960,190 $ 394 0.17 % $ 895,325 $ 357 0.16 % $ 643,955 $ 1,081 0.68 %
Savings deposits 642,241 645 0.41 % 607,481 716 0.47 % 449,021 1,337 1.2 %
Time deposits 583,723 1,457 1.01 % 566,917 1,883 1.32 % 615,102 2,933 1.92 %
Short-term borrowings 140,146 469 1.36 % 140,243 467 1.32 % 119,607 630 2.12 %
Long-term borrowings and capital
trust securities 49,664 545 4.45 % 49,637 547 4.38 % 20,304 219 4.34 %
Total interest bearing
liabilities 2,375,964 3,510 0.60 % 2,259,603 3,970 0.70 % 1,847,989 6,200 1.35 %
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 451,957 426,441 339,340
Other liabilities 38,393 34,558 28,400
Total liabilities 2,866,314 2,720,602 2,215,729
Shareholders' equity 285,685 275,173 260,360
Total liabilities and
shareholders' equity $ 3,151,999 $ 2,995,775 $2,476,089
Net interest earnings$ 26,513 $ 26,474 $ 21,628 Net yield on interest earning assets 3.65 % 3.76 % 3.76 % (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$260,000 ,$268,000 , and$185,000 for the three months endedMarch 31, 2021 ,December 31, 2020 andMarch 31, 2020 , respectively. Table of Contents 49
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Table II - Changes in Net Interest Income Attributable to Rate and Volume
For the Quarter Ended For the Quarter Ended
March 31, 2021 vs. December 31, 2020 March 31, 2021 vs. March 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 $ 436 $ (791) $ (355) $ 4,901 $ (2,571) $ 2,330
Tax-exempt (6) 1 (5) (27) (7) (34)
Securities
Taxable 28 (74) (46) 47 (509) (462)
Tax-exempt (37) 6 (31) 590 (198) 392
Federal funds sold and
interest bearing deposits with
other banks 35 (19) 16 109 (140) (31)
Total interest earned on
interest earning assets 456 (877) (421) 5,620 (3,425) 2,195
Interest paid on:
Interest bearing demand
deposits 22 15 37 366 (1,053) (687)
Savings deposits 34 (105) (71) 418 (1,110) (692)
Time deposits 50 (476) (426) (144) (1,332) (1,476)
Short-term borrowings - 2 2 93 (254) (161)
Long-term borrowings and
capital trust securities - (2) (2) 320 6 326
Total interest paid on
interest bearing liabilities 106 (566) (460) 1,053 (3,743) (2,690)
Net interest income $ 350 $ (311) $ 39 $ 4,567 $ 318 $ 4,885
Credit Experience
For purposes of this discussion, nonperforming assets include foreclosed properties, other repossessed assets, and nonperforming loans, which is comprised of loans 90 days or more past due and still accruing interest and nonaccrual loans. Performing TDRs are excluded from nonperforming 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. We recorded$1.50 million and$5.25 million provisions for credit losses (for both funded loans and unfunded commitments) for the first three months of 2021 and 2020 as detailed in the following table.
Table III - Provision for Credit Losses
For the Three Months Ended
March 31,
Dollars in thousands 2021 2020
Provision for credit losses due to changes in:
Loan volume, mix and loss experience 1,974 (180)
Reasonable and supportable economic forecasts (1,500) 5,100
Individually evaluated credits 1,026 180
Acquired loans - 150
Total $ 1,500 $ 5,250
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50-------------------------------------------------------------------------------- The 2021 decline primarily resulted from improved unemployment and GDP forecasts due to a strengthening post-COVID economic recovery while first quarter 2020 economic forecasts as result of COVID-19 were extraordinarily negative. We incurred net loan charge-offs of$189,000 in first quarter 2021 (0.03 percent of average loans annualized), compared to$501,000 net loan charge-offs during first quarter 2020. As illustrated in Table IV below, our non-performing assets have increased since year end 2020. Table IV - Summary of Non-Performing Assets March 31, December 31, Dollars in thousands 2021 2020 2020 Accruing loans past due 90 days or more$ 2 $ 12 $ 2 Nonaccrual loans Commercial 848 560 525 Commercial real estate 17,137 5,644 14,237 Commercial construction and development - - - Residential construction and development 626 11 235 Residential real estate 6,667 4,343 5,264 Consumer 52 53 72 Other - 100 - Total nonaccrual loans 25,330 10,711 20,333 Foreclosed properties Commercial - - - Commercial real estate 2,281 1,866 2,581 Commercial construction and development 3,884 4,511 4,154 Residential construction and development 7,129 10,774 7,791 Residential real estate 624 1,136 1,062 Total foreclosed properties 13,918 18,287 15,588 Repossessed assets - 49 - Total nonperforming assets$ 39,250
1.03 % 0.53 % 0.84 %
Total nonperforming assets as a percentage of
total assets 1.21 % 1.16 % 1.16 %
Allowance for credit losses-loans as a percentage
of nonperforming loans 134.39 % 229.49 % 158.57 %
Allowance for credit losses-loans as a percentage
of period end loans 1.39 % 1.23 % 1.34 %
The following table details the activity regarding our foreclosed properties for
the three months ended
Table V - Foreclosed Property Activity
For the Three Months Ended
March 31,
Dollars in thousands 2021 2020
Beginning balance $ 15,588 $ 19,276
Acquisitions - 136
Improvements - 585
Disposals (1,647) (764)
Writedowns to fair value (23) (946)
Balance March 31 $ 13,918 $ 18,287
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.
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At March 31, 2021 and December 31, 2020 , our allowance for loan credit losses
totaled $34.0 million , or 1.39% of total loans and $32.2 million , or 1.34% of
total loans. The allowance for loan credit losses is considered adequate to
cover an estimate of the full amount of expected credit losses relative to
loans.
At March 31, 2021 and December 31, 2020 we had approximately $13.9 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.
Noninterest Income
Total noninterest income for the three months endedMarch 31, 2021 increased 10.5% compared to the same period of 2020 principally due to higher mortgage origination revenue due to higher volumes of secondary market loans driven primarily by historically low interest rates and higher bank card revenue due to increased customer usage. Further detail regarding noninterest income is reflected in the following table.
Table VI - Noninterest Income
For the Quarter Ended March 31,
Dollars in thousands 2021 2020
Trust and wealth management fees 638 665
Mortgage origination revenue 998
214
Service charges on deposit accounts 1,100 1,263
Bank card revenue 1,341 933
Realized securities gains 476 1,038
Bank owned life insurance income 298 264
Other 123 125
Total $ 4,974 $ 4,502
Noninterest Expense
Total noninterest expense increased 9.6% for the three months ended March 31,
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 VII below shows the breakdown of the
changes.
Table VII- Noninterest Expense
For the Quarter Ended March 31,
Change
Dollars in thousands 2021 $ % 2020
Salaries, commissions, and employee benefits
9.9 % $ 7,672
Net occupancy expense 1,174 291 33.0 % 883
Equipment expense 1,581 152 10.6 % 1,429
Professional fees 338 (49) (12.7) % 387
Advertising and public relations 90 (62) (40.8) % 152
Amortization of intangibles 405 (24) (5.6) % 429
FDIC premiums 277 112 67.9 % 165
Bank card expense 573 70 13.9 % 503
Foreclosed properties expense, net 227 (739) (76.5) % 966
Merger-related expenses 440 (348) (44.2) % 788
Other 2,893 1,268 78.0 % 1,625
Total $ 16,433 $ 1,434 9.6 % $ 14,999
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52-------------------------------------------------------------------------------- Salaries, commissions, and employee benefits: The increases in these expenses for the three months endedMarch 31, 2021 compared to the same period of 2020 is primarily due to an increase in number of employees, resulting from the Cornerstone, MVB branches andWinFirst acquisitions, and general merit raises.
Foreclosed properties expense, net: The decrease in foreclosed properties
expense, net of gains/losses, for the three months ended
Merger-related expenses: Merger-related expenses during 2021 are related to
Other: The increase in other expenses for the three months ended
•Deferred director compensation plan expense of$236,000 in 2021 compared to income of$483,000 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 first quarter 2021, we incurred$117,000 in fraud/counterfeit losses compared to$6,000 during first quarter 2020 •Secondary loan underwriting expenses were$98,000 higher during first quarter 2021 due to higher volumes of secondary market loans driven primarily by historically low interest rates •Internet banking expense increased$75,000 due to increased internet banking activity by clients Income Taxes Our income tax expense for the three months endedMarch 31, 2021 andMarch 31, 2020 totaled$2.9 million and$1.2 million , respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters endedMarch 31, 2021 and 2020 was 22.1% and 20.9%, respectively. Refer to Note 16 of the accompanying financial statements for further information regarding our income taxes. Table of Contents 53
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