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EX-32.2 - EXHIBIT 32.2 - WILSON BANK HOLDING COwbhc09302016ex322.htm
EX-32.1 - EXHIBIT 32.1 - WILSON BANK HOLDING COwbhc09302016ex321.htm
EX-31.2 - EXHIBIT 31.2 - WILSON BANK HOLDING COwbhc09302016ex312.htm
EX-31.1 - EXHIBIT 31.1 - WILSON BANK HOLDING COwbhc09302016ex311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 0-20402
 

WILSON BANK HOLDING COMPANY
(Exact name of registrant as specified in its charter) 
 
 
Tennessee
 
62-1497076
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
623 West Main Street, Lebanon, TN
 
37087
(Address of principal executive offices)
 
(Zip Code)
 (615) 444-2265
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock outstanding: 10,318,908 shares at November 8, 2016
 



Part I:
 
  
 
 
 
 
 
Item 1.
 
  
 
 
 
 
 
The unaudited consolidated financial statements of the Company and its subsidiary are as follows:
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
Item 2.
 
  
 
 
 
 
 
Item 3.
 
  
 
 
 
 
 
 
 
Disclosures required by Item 3 are incorporated by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations.
  
 
 
 
 
 
 
Item 4.
 
  
 
 
 
 
 
Part II:
 
  
 
 
 
 
 
Item 1.
 
  
 
 
 
 
 
Item 1A.
 
  
 
 
 
 
 
Item 2.
 
  
 
 
 
 
 
Item 3.
 
  
 
 
 
 
 
Item 4.
 
  
 
 
 
 
 
Item 5.
 
  
 
 
 
 
 
Item 6.
 
  
 
 
 
 
 
  
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
  
 
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
  
 
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
  
 
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  
 
EX-101 INTERACTIVE DATA FILE
  
 



Part I. Financial Information
Item 1. Financial Statements
WILSON BANK HOLDING COMPANY
Consolidated Balance Sheets
September 30, 2016 (Unaudited)
and December 31, 2015

 
 
September 30,
2016
 
December 31,
2015
 
(Dollars in Thousands
Except Share Amounts)
Assets
 
 
 
Loans
$
1,625,273

 
$
1,466,079

Less: Allowance for loan losses
(23,320
)
 
(22,900
)
Net loans
1,601,953

 
1,443,179

Securities:
 
 
 
Held to maturity, at cost (market value $37,227 and $28,365, respectively)
36,750

 
28,195

Available-for-sale, at market (amortized cost $357,374 and $332,506, respectively)
359,840

 
331,128

Total securities
396,590

 
359,323

Loans held for sale
11,019

 
10,135

Restricted equity securities
3,012

 
3,012

Federal funds sold
3,950

 
35,220

Total earning assets
2,016,524

 
1,850,869

Cash and due from banks
42,093

 
74,033

Bank premises and equipment, net
42,492

 
42,100

Accrued interest receivable
5,600

 
5,244

Deferred income tax asset
8,554

 
8,039

Other real estate
4,887

 
5,410

Bank owned life insurance
28,397

 
17,733

Other assets
16,961

 
13,371

Goodwill
4,805

 
4,805

Total assets
$
2,170,313

 
$
2,021,604

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
1,909,288

 
$
1,789,850

Securities sold under repurchase agreements
1,099

 
2,035

Accrued interest and other liabilities
16,584

 
6,281

Total liabilities
1,926,971

 
1,798,166

Stockholders’ equity:
 
 
 
Common stock, $2.00 par value; authorized 50,000,000 and 15,000,000 shares, issued and outstanding 10,318,308 and 10,202,859 shares, respectively
20,637

 
20,406

Additional paid-in capital
60,464

 
56,237

Retained earnings
160,720

 
147,646

Net unrealized gains (losses) on available-for-sale securities, net of income taxes of $945 and $527, respectively
1,521

 
(851
)
Total stockholders’ equity
243,342

 
223,438

Total liabilities and stockholders’ equity
$
2,170,313

 
$
2,021,604


See accompanying notes to consolidated financial statements (unaudited)

3



WILSON BANK HOLDING COMPANY
Consolidated Statements of Earnings
Three Months and Nine Months Ended September 30, 2016 and 2015
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in Thousands
Except Per Share Amounts)
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
19,347

 
$
18,262

 
$
56,796

 
$
53,123

Interest and dividends on securities:
 
 
 
 
 
 
 
Taxable securities
1,524

 
1,356

 
4,380

 
4,492

Exempt from Federal income taxes
329

 
208

 
830

 
551

Interest on loans held for sale
136

 
104

 
295

 
269

Interest on Federal funds sold
87

 
22

 
275

 
100

Interest and dividends on restricted securities
31

 
30

 
92

 
91

Total interest income
21,454

 
19,982

 
62,668

 
58,626

Interest expense:
 
 
 
 
 
 
 
Interest on negotiable order of withdrawal accounts
348

 
389

 
1,076

 
1,143

Interest on money market and savings accounts
477

 
449

 
1,476

 
1,447

Interest on certificates of deposit
1,251

 
1,275

 
3,738

 
3,925

Interest on federal funds purchased

 

 
2

 
1

Interest on securities sold under repurchase agreements
1

 
1

 
2

 
5

Total interest expense
2,077

 
2,114

 
6,294

 
6,521

Net interest income before provision for loan losses
19,377

 
17,868

 
56,374

 
52,105

Provision for loan losses
141

 
109

 
290

 
265

Net interest income after provision for loan losses
19,236

 
17,759

 
56,084

 
51,840

Non-interest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
1,513

 
1,401

 
4,247

 
3,755

Other fees and commissions
2,665

 
2,560

 
7,732

 
6,993

Income on BOLI and annuity contracts
345

 
208

 
630

 
765

Gain on sale of loans
1,244

 
1,061

 
3,141

 
3,057

Gain on sale of other real estate

 
259

 
373

 
305

Gain on sale of securities
377

 
19

 
620

 
185

Total non-interest income
6,144

 
5,508

 
16,743

 
15,060

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
8,520

 
7,802

 
25,201

 
23,348

Occupancy expenses, net
999

 
944

 
2,693

 
2,542

Furniture and equipment expense
492

 
538

 
1,526

 
1,535

Data processing expense
581

 
685

 
1,942

 
1,773

Directors’ fees
158

 
169

 
496

 
526

Other operating expenses
3,509

 
3,245

 
10,588

 
8,239

Loss on the sale of fixed assets
26

 
22

 
26

 
30

Loss on sale of other assets

 

 
1

 
2

Total non-interest expense
14,285

 
13,405

 
42,473

 
37,995

Earnings before income taxes
11,095

 
9,862

 
30,354

 
28,905

Income taxes
4,177

 
3,774

 
11,523

 
11,000

Net earnings
$
6,918

 
$
6,088

 
$
18,831

 
$
17,905

Weighted average number of common shares outstanding-basic
10,300,323

 
10,183,264

 
10,266,061

 
10,153,461

Weighted average number of common shares outstanding-diluted
10,305,312

 
10,187,728

 
10,271,018

 
10,158,040

Basic earnings per common share
$
0.67

 
$
0.60

 
$
1.83

 
$
1.76

Diluted earnings per common share
$
0.67

 
$
0.60

 
$
1.83

 
$
1.76

Dividends per share
$
0.30

 
$
0.35

 
$
0.65

 
$
0.65


See accompanying notes to consolidated financial statements (unaudited)

4



WILSON BANK HOLDING COMPANY
Consolidated Statements of Comprehensive Earnings
Three Months and Nine Months Ended September 30, 2016 and 2015
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands)
Net earnings
$
6,918

 
$
6,088

 
$
18,831

 
$
17,905

Other comprehensive earnings (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities arising during period, net of taxes of $2, $623, $1,708 and $660, respectively
4

 
1,005

 
2,755

 
1,063

Reclassification adjustment for net gains included in net earnings, net of taxes of $144, $7, $236 and $71, respectively
(233
)
 
(12
)
 
(383
)
 
(114
)
Other comprehensive earnings (loss)
(229
)
 
993

 
2,372

 
949

Comprehensive earnings
$
6,689

 
$
7,081

 
$
21,203

 
$
18,854


See accompanying notes to consolidated financial statements (unaudited)


5



WILSON BANK HOLDING COMPANY
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2016 and 2015
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited) 
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In Thousands)
Cash flows from operating activities:
 
 
 
Interest received
$
64,223

 
$
60,239

Fees and commissions received
11,979

 
11,513

Proceeds from sale of loans held for sale
121,254

 
120,450

Origination of loans held for sale
(118,997
)
 
(121,364
)
Interest paid
(6,466
)
 
(6,755
)
Cash paid to suppliers and employees
(33,811
)
 
(31,432
)
Income taxes paid
(11,283
)
 
(11,499
)
Net cash provided by operating activities
26,899

 
21,152

Cash flows from investing activities:
 
 
 
Proceeds from maturities, calls, and principal payments of held-to-maturity securities
2,678

 
2,663

Proceeds from maturities, calls, and principal payments of available-for-sale securities
85,932

 
64,972

Proceeds from the sale of available-for-sale securities
69,440

 
42,844

Purchase of held-to-maturity securities
(11,479
)
 
(527
)
Purchase of available-for-sale securities
(181,285
)
 
(54,017
)
Loans made to customers, net of repayments
(158,726
)
 
(114,875
)
Purchase of bank owned life insurance and annuity contracts
(11,916
)
 
(8,464
)
Purchase of premises and equipment
(2,484
)
 
(3,118
)
Proceeds from sale of other real estate
542

 
1,207

Proceeds from sale of other assets
15

 
12

Net cash used in investing activities
(207,283
)
 
(69,303
)
Cash flows from financing activities:
 
 
 
Net increase in non-interest bearing, savings and NOW deposit accounts
128,316

 
83,403

Net decrease in time deposits
(8,878
)
 
(19,846
)
Net decrease in securities sold under repurchase agreements
(936
)
 
(583
)
Dividends paid
(5,756
)
 
(4,935
)
Proceeds from sale of common stock pursuant to dividend reinvestment
4,316

 
3,511

Proceeds from exercise of stock options
112

 
190

Net cash provided by financing activities
117,174

 
61,740

Net decrease in cash and cash equivalents
(63,210
)
 
13,589

Cash and cash equivalents at beginning of period
109,253

 
68,007

Cash and cash equivalents at end of period
$
46,043

 
$
81,596

 
See accompanying notes to consolidated financial statements (unaudited)








6



WILSON BANK HOLDING COMPANY
Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30, 2016 and 2015
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited) 
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
(In Thousands)
Reconciliation of net earnings to net cash provided by operating activities:
 
 
 
 
Net earnings
 
18,831

 
17,905

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization, and accretion
 
3,977

 
3,394

Provision for loan losses
 
290

 
265

Gain on sale other real estate
 
(373
)
 
(305
)
Security gains
 
(620
)
 
(185
)
Stock option compensation
 
29

 
30

Loss on the sale of other assets
 
1

 
2

Loss on the sale of premises and equipment
 
26

 
30

Increase in loans held for sale
 
(884
)
 
(3,971
)
Increase in deferred tax assets
 
(1,987
)
 
(587
)
Increase in other assets, bank owned life insurance and annuity contract earnings
 
(2,338
)
 
(1,059
)
Decrease (increase) in interest receivable
 
(356
)
 
123

Increase in other liabilities
 
8,248

 
5,656

Increase in taxes payable
 
2,227

 
88

Decrease in interest payable
 
(172
)
 
(234
)
Total adjustments
 
8,068

 
3,247

                         Net cash provided by operating activities
 
$
26,899


$
21,152

 
 
 
 
 
Supplemental schedule of non-cash activities:
 
 
 
 
Unrealized gain (loss) in value of securities available-for-sale, net of taxes of $1,472 and $589 for the nine months ended September 30, 2016 and 2015, respectively
 
$
2,372

 
$
949

Non-cash transfers from loans to other real estate
 
$
696

 
$
1,317

Non-cash transfers from other real estate to loans
 
$
1,050

 
$
1,180

Non-cash transfers from loans to other assets
 
$
16

 
$
4

See accompanying notes to consolidated financial statements (unaudited)

7



WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Nature of Business — Wilson Bank Holding Company (the “Company”) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Wilson Bank & Trust (the “Bank”). The Bank is a commercial bank headquartered in Lebanon, Tennessee. The Bank provides a full range of banking services in its primary market areas of Wilson, Davidson, Rutherford, Trousdale, Sumner, Dekalb, Putnam and Smith Counties, Tennessee.

Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

On March 15, 2016, the Company's board of directors approved a four-for-three stock split payable on March 30, 2016 to shareholders of record as of the close of business on March 24, 2016. As a result, the Company issued 2,564,091 shares of the Company's common stock, $2.00 per share, to the shareholders of record as of March 24, 2016. Current and prior year earnings per share figures have been adjusted to reflect the stock split and the Company has elected to retroactively reclassify common stock and additional paid-in capital, which amounted to $5,102,000 at December 31, 2015.
These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Significant intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, the valuation of deferred tax assets, determination of any impairment of intangibles, other-than-temporary impairment of securities, the valuation of other real estate, and the fair value of financial instruments. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. There have been no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the interest method.
Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, a loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which often is determined when the principal or interest on the loan is more than 90 days past due, unless the loan is both well-secured and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status, is reversed against current income. Interest income is subsequently recognized only to the extent cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis. A nonaccrual loan is returned to accruing status once the loan has been brought current and collection is reasonably assured or the loan has been “well-secured” through other techniques. Past due status is determined based on the contractual due date per the underlying loan agreement.


8



All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans. At December 31, 2015 and at September 30, 2016, there were no loans classified as nonaccrual that were not also deemed to be impaired except for those loans not individually evaluated for impairment as described below. A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan. This determination is made using a variety of techniques, which include a review of the borrower’s financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc). Prior to January 1, 2015, loans with an identified weakness and principal balance of $100,000 or more were subject to individual identification for impairment. During the first quarter of 2015, the Company increased the threshold for identification of individually impaired loans to $500,000, based on regulatory developments, continued improvement in loan quality trends and ratios and strengthening local economies in which the Company operates. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a specific valuation allowance is established as a component of the allowance for loan losses or, in the case of collateral dependent loans, the excess may be charged off. Changes to the valuation allowance are recorded as a component of the provision for loan losses. Any subsequent adjustments to present value calculations for impaired loan valuations as a result of the passage of time, such as changes in the anticipated payback period for repayment, are recorded as a component of the provision for loan losses. For loans less than $500,000, the Company assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for non-impaired loans of a similar type.
Allowance for Loan Losses — The allowance for loan losses is maintained at a level that management believes to be adequate to absorb probable losses in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, historical loan loss factors, loss experience of various loan segments, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans.
In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, independent loan reviewers, and reviews that may have been conducted by third-party reviewers. We incorporate relevant loan review results in the loan impairment determination. In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

Recently Issued Accounting Pronouncements    

In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-1, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

In February 2016, FASB issued ASU 2016-02, "Leases (Topic 842)."  The amendments in this ASU are effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted.  As a result of the amendment, lessees will need to recognize a right-of-use asset and a lease liability

9



for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustments, such as adjustments for initial direct costs. For income statement purposes, FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines.  We currently do not expect this ASU to have a material impact on our consolidated financial statements.

In March 2016, FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting."  The amendments in this ASU simplify  several  aspects  of  the  accounting  for  share-based  payment award  transactions,  including:  (1) income  tax  consequences;  (2)  classification  of  awards  as  either equity or liabilities, and (3) classification on the statement of cash flows. For public companies, like the Company, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period; however, the Company chose not to adopt the pronouncement early.  We currently do not expect this ASU to have a material impact on our consolidated financial statements.

In June 2016, FASB  issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements.  We are also evaluating sufficiency of current systems and data needed to comply with this ASU. 

In August 2016, FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230.  The update addresses eight specific cash flow issues, including but not limited to proceeds from the settlement of bank-owned life insurance policies, with the objective of reducing the existing diversity in practice.  ASU 2016-15 will be effective on January 1, 2018. We are currently evaluating the potential impact of ASU 2016-15 on our financial statements.

Other than those previously discussed, there were no other recently issued accounting pronouncements that are expected to materially impact the Company.
Note 2. Loans and Allowance for Loan Losses
For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).
The following schedule details the loans of the Company at September 30, 2016 and December 31, 2015:

10



 
(In Thousands)
 
September 30,
2016
 
December 31,
2015
Mortgage loans on real estate
 
 
 
       Residential 1-4 family
$
371,141

 
$
349,631

Multifamily
82,085

 
49,564

Commercial
688,427

 
625,623

Construction and land development
302,918

 
275,319

Farmland
37,746

 
32,114

Second mortgages
7,976

 
7,551

Equity lines of credit
53,300

 
46,506

Total mortgage loans on real estate
1,543,593

 
1,386,308

Commercial loans
34,527

 
30,537

Agricultural loans
1,565

 
1,552

Consumer installment loans
 
 
 
Personal
39,217

 
40,196

Credit cards
3,029

 
3,271

Total consumer installment loans
42,246

 
43,467

Other loans
9,297

 
9,250

                                Total loans before net deferred loan fees
1,631,228

 
1,471,114

Net deferred loan fees
(5,955
)
 
(5,035
)
Total loans
1,625,273

 
1,466,079

Less: Allowance for loan losses
(23,320
)
 
(22,900
)
Net loans
$
1,601,953

 
$
1,443,179


Risk characteristics relevant to each portfolio segment are as follows:

Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayments substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value ("LTV"), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment.

1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit.

11



These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans, as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.

Multi-family and commercial real estate: Multi-family and commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. These loan may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

12



Transactions in the allowance for loan losses for the nine months ended September 30, 2016 and year ended December 31, 2015 are summarized as follows:

 
(In Thousands)
 
Residential
1-4 Family
 
Multifamily
 
Commercial
Real Estate
 
Construction
 
Farmland
 
Second
Mortgages
 
Equity Lines
of Credit
 
Commercial
 
Agricultural, Installment and Other
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,024

 
619

 
9,986

 
5,136

 
654

 
106

 
594

 
301

 
480

 
22,900

Provision
(226
)
 
391

 
185

 
(659
)
 
106

 
(28
)
 
18

 
23

 
480

 
290

Charge-offs
(97
)
 

 

 
(66
)
 

 

 

 
(11
)
 
(527
)
 
(701
)
Recoveries
49

 

 
53

 
523

 
1

 
4

 
15

 
6

 
180

 
831

Ending balance
$
4,750

 
1,010

 
10,224

 
4,934

 
761

 
82

 
627

 
319

 
613

 
23,320

Ending balance individually evaluated for impairment
$
179

 

 

 

 

 

 

 

 

 
179

Ending balance collectively evaluated for impairment
$
4,571

 
1,010

 
10,224

 
4,934

 
761

 
82

 
627

 
319

 
613

 
23,141

Ending balance loans acquired with deteriorated credit quality
$

 

 

 

 

 

 

 

 

 

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
371,141

 
82,085

 
688,427

 
302,918

 
37,746

 
7,976

 
53,300

 
34,527

 
53,108

 
1,631,228

Ending balance individually evaluated for impairment
$
681

 

 
4,253

 
1,698

 
104

 

 

 

 

 
6,736

Ending balance collectively evaluated for impairment
$
370,460

 
82,085

 
684,174

 
301,220

 
37,642

 
7,976

 
53,300

 
34,527

 
53,108

 
1,624,492

Ending balance loans acquired with deteriorated credit quality
$

 

 

 

 

 

 

 

 

 


13



 
Residential
1-4 Family
 
Multifamily
 
Commercial
Real Estate
 
Construction
 
Farmland
 
Second
Mortgages
 
Equity Lines
of Credit
 
Commercial
 
Agricultural, Installment and Other
 
Total
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,582

 
172

 
9,578

 
5,578

 
795

 
61

 
304

 
176

 
326

 
22,572

Provision
(290
)
 
447

 
(267
)
 
(455
)
 
(142
)
 
87

 
303

 
118

 
587

 
388

Charge-offs
(311
)
 

 
(44
)
 
(26
)
 

 
(45
)
 
(14
)
 

 
(664
)
 
(1,104
)
Recoveries
43

 

 
719

 
39

 
1

 
3

 
1

 
7

 
231

 
1,044

Ending balance
$
5,024

 
619

 
9,986

 
5,136

 
654

 
106

 
594

 
301

 
480

 
22,900

Ending balance individually evaluated for impairment
$
194

 

 

 

 

 

 

 

 

 
194

Ending balance collectively evaluated for impairment
$
4,830

 
619

 
9,986

 
5,136

 
654

 
106

 
594

 
301

 
480

 
22,706

Ending balance loans acquired with deteriorated credit quality
$

 

 

 

 

 

 

 

 

 

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
349,631

 
49,564

 
625,623

 
275,319

 
32,114

 
7,551

 
46,506

 
30,537

 
54,269

 
1,471,114

Ending balance individually evaluated for impairment
$
1,449

 

 
4,643

 
1,938

 
575

 

 

 

 

 
8,605

Ending balance collectively evaluated for impairment
$
348,182

 
49,564

 
620,980

 
273,381

 
31,539

 
7,551

 
46,506

 
30,537

 
54,269

 
1,462,509

Ending balance loans acquired with deteriorated credit quality
$

 

 

 

 

 

 

 

 

 



14



Impaired Loans
At September 30, 2016, the Company had certain impaired loans of $3.0 million which were on non-accruing interest status. At December 31, 2015, the Company had certain impaired loans of $4.9 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The following table presents the Company’s impaired loans at September 30, 2016 and December 31, 2015. 
 
In Thousands
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
September 30, 2016
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
149

 
148

 

 
149

 
5

Multifamily

 

 

 

 

Commercial real estate
4,256

 
4,253

 

 
4,386

 
24

Construction
1,703

 
1,698

 

 
1,830

 
64

Farmland
105

 
104

 

 
70

 
3

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
6,213

 
6,203

 

 
6,435

 
96

With allowance recorded:
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
541

 
533

 
179

 
539

 
24

Multifamily

 

 

 

 

Commercial real estate

 

 

 

 

Construction

 

 

 

 

Farmland

 

 

 

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
541

 
533

 
179

 
539

 
24

Total
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
690

 
681

 
179

 
688

 
29

Multifamily

 

 

 

 

Commercial real estate
4,256

 
4,253

 

 
4,386

 
24

Construction
1,703

 
1,698

 

 
1,830

 
64

Farmland
105

 
104

 

 
70

 
3

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
6,754

 
6,736

 
179

 
6,974

 
120


15



 
In Thousands
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
December 31, 2015
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
633

 
622

 

 
724

 
39

Multifamily

 

 

 

 

Commercial real estate
4,645

 
4,643

 

 
5,048

 
24

Construction
1,943

 
1,938

 

 
486

 
97

Farmland
575

 
575

 

 
431

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
7,796

 
7,778

 

 
6,689

 
160

With allowance recorded:
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
834

 
827

 
194

 
785

 
47

Multifamily

 

 

 

 

Commercial real estate

 

 

 
3,419

 

Construction

 

 

 

 

Farmland

 

 

 
144

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
834

 
827

 
194

 
4,348

 
47

Total:
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
1,467

 
1,449

 
194

 
1,509

 
86

Multifamily

 

 

 

 

Commercial real estate
4,645

 
4,643

 

 
8,467

 
24

Construction
1,943

 
1,938

 

 
486

 
97

Farmland
575

 
575

 

 
575

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
8,630

 
8,605

 
194

 
11,037

 
207

Impaired loans also include loans that the Company may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may otherwise incur. These loans are classified as impaired loans and, if on non-accruing status as of the date of restructuring, the loans are included in the nonperforming loan balances. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

Troubled Debt Restructuring
The Bank’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

16



The following table summarizes the carrying balances of TDR’s at September 30, 2016 and December 31, 2015. 
 
September 30, 2016
 
December 31, 2015
 
(In thousands)
Performing TDRs
$
2,411

 
$
983

Nonperforming TDRs
1,896

 
3,121

Total TDRS
$
4,307

 
$
4,104


The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the nine months ended September 30, 2016 and the year ended December 31, 2015 (in thousands, except for number of contracts): 
 
September 30, 2016
 
December 31, 2015
 
Number
of
Contracts
 
Pre
Modification
Outstanding
Recorded
Investment
 
Post
Modification
Outstanding
Recorded
Investment,
Net of Related
Allowance
 
Number
of
Contracts
 
Pre
Modification
Outstanding
Recorded
Investment
 
Post
Modification
Outstanding
Recorded
Investment,
Net of Related
Allowance
Residential 1-4 family
3

 
$
124

 
$
124

 
2

 
$
77

 
$
77

Multifamily

 

 

 

 

 

Commercial real estate
1

 
927

 
927

 

 

 

Construction

 

 

 
1

 
1,938

 
1,938

Farmland
1

 
105

 
105

 

 

 

Second mortgages

 

 

 

 

 

Equity lines of credit

 

 

 

 

 

Commercial

 

 

 

 

 

Agricultural, installment and other
2

 
18

 
18

 
1

 
2

 
1

Total
7

 
$
1,174

 
$
1,174

 
4

 
$
2,017

 
$
2,016

    
As of September 30, 2016, the Company had no loan relationships that had been previously classified as troubled debt restructuring subsequently default within twelve months of restructuring. As of December 31, 2015, the Company had two loans totaling $1,060,000 that had been previously classified as troubled debt restructuring subsequently default within twelve months of restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract.

As of September 30, 2016 and December 31, 2015, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $478,000 and $639,000, respectively.
Potential problem loans, which include nonperforming loans, amounted to approximately $16.0 million at September 30, 2016 compared to $25.2 million at December 31, 2015. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.
The following summary presents our loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:
 
Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize

17



liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Bank considers all doubtful loans to be impaired and places the loan on nonaccrual status.



18



The following table is a summary of the Bank’s loan portfolio by risk rating at September 30, 2016 and December 31, 2015: 
 
(In Thousands)
 
Residential
1-4 Family
 
Multifamily
 
Commercial
Real Estate
 
Construction
 
Farmland
 
Second
Mortgages
 
Equity
Lines
of Credit
 
Commercial
 
Agricultural, installment and other
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by Internally Assigned Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
362,187

 
82,085

 
683,359

 
302,611

 
36,893

 
7,552

 
53,045

 
34,527

 
52,991

 
1,615,250

Special Mention
5,609

 

 
353

 
200

 
151

 
306

 
116

 

 
28

 
6,763

Substandard
3,345

 

 
4,715

 
107

 
702

 
118

 
139

 

 
89

 
9,215

Doubtful

 

 

 

 

 

 

 

 

 

Total
$
371,141

 
82,085

 
688,427

 
302,918

 
37,746

 
7,976

 
53,300

 
34,527

 
53,108

 
1,631,228

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by Internally Assigned Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
340,019

 
49,564

 
612,318

 
274,926

 
30,933

 
7,097

 
46,361

 
30,525