Attached files
| file | filename |
|---|---|
| EX-21.1 - EXHIBIT 21.1 - WILSON BANK HOLDING CO | exhibit21112312016.htm |
| 10-K - 10-K - WILSON BANK HOLDING CO | wbhc2016123110-k.htm |
| EX-32.2 - EXHIBIT 32.2 - WILSON BANK HOLDING CO | exhibit32212312016.htm |
| EX-32.1 - EXHIBIT 32.1 - WILSON BANK HOLDING CO | exhibit32112312016.htm |
| EX-31.2 - EXHIBIT 31.2 - WILSON BANK HOLDING CO | exhibit31212312016.htm |
| EX-31.1 - EXHIBIT 31.1 - WILSON BANK HOLDING CO | exhibit31112312016.htm |
| EX-23.1 - EXHIBIT 23.1 - WILSON BANK HOLDING CO | exhibit23112312016.htm |
Exhibit 13.1
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended regarding, among other things, the anticipated financial and operating results of the Company. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.
The Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and also include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for these losses, (ii) renewed deterioration in the real estate market conditions in the Company’s market areas, (iii) increased competition with other financial institutions, (iv) the deterioration of the economy in the Company’s market areas, (v) rapid fluctuations in short-term interest rates, (vi) significant downturns in the business of one or more large customers, (vii) the inability of the Company to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (viii) changes in state or Federal regulations, policies, or legislation applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, (ix) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (x) inadequate allowance for loan losses, (xi) the effectiveness of the Company’s activities in improving, resolving or liquidating lower quality assets, (xii) results of regulatory examinations, (xiii) the vulnerability of our network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xiv) the possibility of additional increases to compliance costs as a result of increased regulatory oversight; and (xv) loss of key personnel. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements.
General
The Company is a registered bank holding company that owns 100% of the common stock of Wilson Bank and Trust (“Wilson Bank”), a state bank headquartered in Lebanon, Tennessee. The Company was formed in 1992.
Wilson Bank is a community bank headquartered in Lebanon, Tennessee, serving Wilson County, DeKalb County, Smith County, Trousdale County, Rutherford County, the eastern part of Davidson County, Putnam County, and Sumner County, Tennessee as its primary market areas. Generally, this market is the eastern portion of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee metropolitan statistical area. At December 31, 2016, Wilson Bank had twenty-six locations in Wilson, Davidson, DeKalb, Smith, Sumner, Rutherford, Putnam, and Trousdale Counties. Management believes that these counties offer an environment for continued growth, and the Company’s target market is local consumers, professionals and small businesses. Wilson Bank offers a wide range of banking services, including checking, savings and money market deposit accounts, certificates of deposit and loans for consumer, commercial and real estate purposes. The Company also offers an investment center which offers a full line of investment services to its customers.
The following discussion and analysis is designed to assist readers in their analysis of the Company’s consolidated financial statements and should be read in conjunction with such consolidated financial statements.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses and the assessment of impairment of the intangibles resulting from our mergers with Dekalb Community Bank and Community Bank of Smith County in 2005 have been critical to the determination of our financial position and results of operations. Additional information regarding significant accounting policies is described in Note 1 to the Financial Statements for the year ended December 31, 2016 in the Company’s Annual Report on Form 10-K.
Allowance for Loan Losses (“allowance”)-Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s 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 borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indicators and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. 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. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, is deemed to be uncollectible.
A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs. If the measure of the impaired loan is less than the recorded investment in the loan, the Company recognizes an impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.
The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.
In assessing the adequacy of the allowance, we also consider the results of our ongoing 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, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. We incorporate loan review results in the determination of whether or not it is probable that we will be able to collect all amounts due according to the contractual terms of a loan.
As part of management’s quarterly assessment of the allowance, management divides the loan portfolio into twelve segments based on bank call reporting requirements. Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment.
The allowance allocation begins with a process of estimating the probable losses in each of the twelve loan segments. The estimates for these loans are based on our historical loss data for that category over the last twenty quarters.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The estimated loan loss allocation for all twelve loan portfolio segments is then adjusted for several “environmental” factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, changes in interest rate, and other influencing factors. These environmental factors are considered for each of the twelve loan segments, and the allowance allocation, as determined by the processes noted above for each component, is increased or decreased based on the incremental assessment of these various environmental factors.
We then test the resulting allowance by comparing the balance in the allowance to industry and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The board of directors reviews and approves the assessment prior to the filing of quarterly and annual financial information.
Impairment of Intangible Assets-Long-lived assets, including purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually and are evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. That annual assessment date is December 31. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The Company first has the option to perform a qualitative assessment of goodwill to determine if impairment has occurred. Based upon the qualitative assessment, if the fair value of goodwill exceeds the carrying value, the evaluation of goodwill is complete. If the qualitative assessment indicates that impairment is present, the goodwill impairment analysis continues with a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill.
Other-than-temporary Impairment-Impaired securities are assessed quarterly for the presence of other-than-temporary impairment (“OTTI”). A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security. To determine whether OTTI has occurred, management considers factors such as (1) length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for an anticipated recovery in fair value. If management deems a security to be OTTI, management reviews the present value of the future cash flows associated with the security. A shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss. If a credit loss is identified, the credit loss is recognized in that period as a charge to earnings and a new cost basis for the security is established. If management concludes that no credit loss exists and it is not more-likely-than-not that the Company will be required to sell the security before the recovery of the security’s cost basis, then the security is not deemed OTTI and the shortfall is recorded as a component of equity.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net earnings for the year ended December 31, 2016 were $25,633,000, an increase of $1,770,000, or 7.42%, compared to net earnings of $23,863,000 for 2015. Our 2015 net earnings were 14.85%, or $3,086,000, above our net earnings of $20,777,000 for 2014. Basic earnings per share were $2.49 in 2016, compared with $2.35 in 2015 and $2.06 in 2014. Diluted earnings per share were $2.49 in 2016, compared to $2.35 in 2015 and $2.06 in 2014. Net yield on earning assets for the year ended December 31, 2016 was 3.80%, compared to 3.80% and 3.75% for the years ended December 31, 2015 and December 31, 2014, respectively. Net interest spread for the year ended December 31, 2016 was 3.71%, compared to 3.70% and 3.65% for the years ended December 31, 2015 and December 31, 2014, respectively. See below for further discussion regarding variances related to net interest income, provision for loan losses, non-interest income, non-interest expense and income taxes.
Net Interest Income
Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Total interest income in 2016 was $84,746,000, compared with $78,839,000 in 2015 and $74,380,000 in 2014, in each case excluding tax exempt adjustments relating to tax exempt securities. The increase in total interest income in 2016 was primarily attributable to an overall increase in loans and the resulting increase in the aggregate amount of interest and fees earned on loans that outpaced an overall reduction in loan yields resulting from competition in our market area. The ratio of average earning assets to total average assets was 95.6%, 95.7% and 95.7% for each of the years ended December 31, 2016, 2015 and 2014, respectively. Average earning assets increased $171,851,000 from December 31, 2015 to December 31, 2016. The average rate earned on earning assets for 2016 was 4.21%, compared with 4.26% in 2015 and 4.32% in 2014. The decrease in yields is a direct reflection of the decrease in loan yields resulting from competition in our area. However, the decreases in earning asset yields were offset by a decrease in the cost of interest-bearing deposits, which when coupled with growth in interest earning assets led to an overall increase in net interest income.
Interest earned on earning assets does not include any interest income which would have been recognized on non-accrual loans if such loans were performing. The amount of interest not recognized on non-accrual loans totaled $202,000 in 2016, $291,000 in 2014 and $39,000 in 2014. Total interest expense for 2016 was $8,284,000, a decrease of $324,000, or 3.76%, compared to total interest expense of $8,608,000 in 2015. The decrease in 2016 was primarily due to a decrease in the rates paid on deposits, particularly transaction accounts and money market accounts, reflecting the low interest rate environment and a continued shift in the mix of deposits from certificates of deposits and individual retirement accounts to transaction and money market accounts. Total interest expense decreased from $9,768,000 in 2014 to $8,608,000 in 2015, a decrease of $1,160,000, or 11.88%, reflecting similar shifts in deposit mix and reductions in rates paid as experienced in 2016.
Net interest income for 2016 totaled $76,462,000 as compared to $70,231,000 and $64,612,000 in 2015 and 2014, respectively. The net interest spread, defined as the effective yield on earning assets less the effective cost of deposits and borrowed funds (calculated on a fully taxable equivalent basis), increased to 3.71% in 2016 from 3.70% in 2015. The net interest spread was 3.65% in 2014. Net yield on earning assets for 2016 and 2015 was 3.80%, up from 3.75% in 2014. The increase in net yield on earning assets resulted from Wilson Bank’s ability to lower deposit costs in excess of the decrease in interest rates received on interest earning assets. Changes in interest rates paid on products such as interest checking, savings, and money market accounts will generally increase or decrease in a manner that is consistent with changes in the short-term environment. The Company’s liabilities are positioned to re-price faster than its assets such that a short-term declining rate environment should have a positive impact on the Company’s earnings as its interest expense decreases faster than interest income. Conversely, a rising rate environment could have a short-term negative impact on margins as many of the Company’s loans have rate floors above current market rates, thus deposits would likely re-price faster than loans. Management regularly monitors the deposit rates of the Company’s competitors and these rates continue to put pressure on the Company’s deposit pricing. This pressure could negatively impact the Company’s net interest margin and earnings if short-term rates begin to rise.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The 2016 provision for loan losses was $379,000, a decrease of $9,000 from the provision of $388,000 in 2015, which was $110,000 lower than the provision in 2014. The decrease in the provision for the year ended December 31, 2016 reflects the improving asset quality trends experienced by Wilson Bank in 2016 reflective of the continued improvement in the economy in Wilson Bank's primary market areas. Management continues to fund the allowance for loan losses through provisions based on management’s calculation of the allowance for loan losses. Current year provisions for loan losses are primarily attributable to loan growth, which
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
was 15.26% in 2016. The provision for loan losses is based on past loan experience and other factors which, in management’s judgment, deserve current recognition in estimating loan losses. Such factors include growth and composition of the loan portfolio, review of specific problem loans, past due and nonperforming loans, change in lending staff, the recommendations of the Company’s regulators, and current economic conditions that may affect the borrowers’ ability to repay.
Wilson Bank’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when they are considered uncollectible. Net charge-offs increased to $548,000 in 2016 from $60,000 in 2015 due to the recovery of one large loan in 2015. Net charge-offs in 2014 totaled $861,000. The ratio of net charge-offs to average total outstanding loans was 0.04% in 2016, 0.004% in 2015 and 0.07% in 2014.
The increase in net charge-offs and decrease in provision for loan losses resulted in a decrease of the allowance for loan losses (net of charge-offs and recoveries) to $22,731,000 at December 31, 2016 from $22,900,000 at December 31, 2015 and $22,572,000 at December 31, 2014. The allowance for loan losses decreased .74% between December 31, 2015 and December 31, 2016 as compared to the 15.26% increase in total loans over the same period, reflecting management's views that the Company's asset quality metrics continued to improve in 2016, and the lower levels of nonperforming assets. The allowance for loan losses was 1.35% of total loans outstanding at December 31, 2016 compared to 1.56% at December 31, 2015 and 1.67% at December 31, 2014. As a percentage of nonperforming loans at December 31, 2016, 2015 and 2014, the allowance for loan losses represented 340%, 242% and 392%, respectively. The internally classified loans as a percentage of the allowance for loan losses were 71.1% and 110.1%, respectively, at December 31, 2016 and 2015.
The level of the allowance and the amount of the provision involve evaluation of uncertainties and matters of judgment. The Company maintains an allowance for loan losses which management believes is adequate to absorb losses inherent in the loan portfolio. A formal review is prepared quarterly by the Chief Financial Officer and provided to the Board of Directors to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The review includes analysis of historical performance, the level of non-performing and adversely rated loans, specific analysis of certain problem loans, loan activity since the previous assessment, reports prepared by the Company's independent Loan Review Department, consideration of current economic conditions and other pertinent information. The level of the allowance to net loans outstanding will vary depending on the overall results of this quarterly assessment. See the discussion under “Critical Accounting Estimates” for more information. Management believes the allowance for loan losses at December 31, 2016 to be adequate, but if economic conditions deteriorate beyond management’s current expectations and additional charge-offs are incurred, the allowance for loan losses may require an increase through additional provision for loan losses which would negatively impact earnings.
Non-Interest Income
The components of the Company’s non-interest income include service charges on deposit accounts, other fees and commissions, fees and gains on sales of loans, gains on sales of securities, bank-owned life insurance (BOLI) and annuity earnings, gain on the sale of other real estate and other income. Total non-interest income for 2016 was $21,728,000, compared with $19,941,000 in 2015 and $16,678,000 in 2014. The 8.96% increase from 2015 was primarily due to an increase in service charges on deposits, an increase in other fees and commissions, an increase in security gains, and increase in fees and gains on sales of loans offset in part by a decrease in income on BOLI and annuity contracts and a decrease on the gain on sale of other real estate. Other fees and commissions increased $939,000 in 2016 when compared to 2015. Other fees and commissions include income on brokerage accounts, debit card interchange fee income, and various other fees. Fees and gains on sales of loans increased $307,000 in 2016 when compared to 2015. The increase in fees and gains on sales of loans during 2016 related primarily to the increase in consumer demand for residential mortgages and the continued improvement in the real estate market in Wilson Bank's lending areas. The service charges on deposit accounts increased $621,000, or 12.06%, to $5,769,000 for the year ended December 31, 2016 compared to the year ended December 31, 2015 as a result of our overdraft privilege program and an increase in consumer checking accounts as well as transactions. Income earned on bank-owned life insurance decreased $45,000, or 5.13%, to $832,000 during the year ended December 31, 2016 compared to the same period in 2015, resulting from the $8.5 million purchase of additional bank-owned life insurance in 2015 that was accompanied by a one-time bonus. Gain on the sale of other real estate decreased $310,000 for the year ended December 31, 2016 as compared to December 31, 2015 due to a lower volume of foreclosures, less other real estate owned transactions, and overall improved economic conditions and housing market.
The Company’s non-interest income is composed of several components, some of which vary significantly between periods. Service charges on deposit accounts and other non-interest income generally reflect the Company’s growth, while fees for origination of mortgage loans and brokerage fees and commissions will often reflect stock and home mortgage market conditions and fluctuate more widely from period to period.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-Interest Expenses
Non-interest expenses consist primarily of employee costs, FDIC premiums, occupancy expenses, furniture and equipment expenses, data processing expenses, directors’ fees, loss on the disposition of other assets and fixed assets, and other operating expenses. Total non-interest expenses for 2016 increased 9.93% to $57,337,000 from $52,159,000 in 2015. Non-interest expenses for 2015 were up 9.3% over non-interest expenses in 2014 which totaled $47,705,000. The increase in non-interest expenses in 2016 is primarily attributable to an increase in salaries and employee benefits and the reversal of an accrual for potential litigation losses that was recorded in 2015. Salaries and employee benefits were up in 2016 when compared to 2015 because the number of employees continued to increase in order to support the Company's growth in operations and new branch expansions. Occupancy expenses for 2016 increased $194,000, or 5.6% from 2015 due to the opening of a new branch and the remodeling of two existing branches.
Income Taxes
The Company’s income tax expense was $14,841,000 for 2016, an increase of $1,079,000 from $13,762,000 for 2015, which was up by $1,452,000 from the 2014 total of $12,310,000. The percentage of income tax expense to earnings before taxes was 36.7% in 2016, 36.6% in 2015 and 37.2% in 2014.
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes at both the federal and state level. Significant judgments and estimates are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we begin with historical results adjusted for changes in accounting policies and incorporate assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income. Changes in current tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position, but if the corporate tax rate was reduced materially, we would likely record a valuation allowance on our deferred tax assets that would negatively impact our results of operations. However, the decrease in current tax provision due to a lowering of rates would likely offset any recorded valuation allowance on our deferred tax assets.
Financial Accounting Standards Board (“FASB”) ASC Topic 740, Income Taxes (“ASC 740”) provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. ASC Topic 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
We recognize tax liabilities in accordance with ASC Topic 740 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Earnings Per Share
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share for the Company begins with the basic earnings per share plus the effect of common shares contingently issuable from stock options.
The following is a summary of components comprising basic and diluted earnings per share (“EPS”) for the years ended December 31, 2016, 2015 and 2014:
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Years Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
(Dollars in Thousands except per share amounts) | |||||||||
Basic EPS Computation | |||||||||
Numerator – Earnings available to common stockholders | $ | 25,633 | 23,863 | 20,777 | |||||
Denominator – Weighted average number of common shares outstanding | 10,279,332 | 10,165,477 | 10,062,783 | ||||||
Basic earnings per common share | $ | 2.49 | 2.35 | 2.06 | |||||
Diluted EPS Computation: | |||||||||
Numerator – Earnings available to common stockholders | $ | 25,633 | 23,863 | 20,777 | |||||
Denominator – Weighted average number of common shares outstanding | 10,279,332 | 10,165,477 | 10,062,783 | ||||||
Dilutive effect of stock options | 4,996 | 4,703 | 5,857 | ||||||
10,284,328 | 10,170,180 | 10,068,640 | |||||||
Diluted earnings per common share | $ | 2.49 | 2.35 | 2.06 | |||||
Financial Condition
Balance Sheet Summary
The Company’s total assets increased by $176,447,000, or 8.73%, to $2,198,051,000 at December 31, 2016, after increasing 7.92% in 2015 to $2,021,604,000 at December 31, 2015. Loans, net of allowance for loan losses, totaled $1,667,088,000 at December 31, 2016, a 15.51% increase compared to December 31, 2015. The increase in loans resulted from an overall increase in loan demand in the housing market, as well as other sectors in which we lend money, along with an increase in marketing efforts that concentrated on increasing the volume of loans. At year end 2016, securities totaled $349,209,000, a decrease of 2.81% from $359,323,000 at December 31, 2015, primarily as a result of management's decision to reinvest liquid funds in higher yielding assets as well as a decrease in the fair market value of the available for sale securities. As a result of loan growth that outpaced deposit growth, fed funds sold decreased $35,220,000, or 100.00% to $0 at December 31, 2016.
Total liabilities increased by $155,265,000, or 8.63%, to $1,953,431,000 at December 31, 2016 compared to $1,798,166,000 at December 31, 2015. This increase was composed primarily of the $152,285,000 increase in total deposits to $1,942,135,000, a 8.51% increase from December 31, 2015. Securities sold under repurchase agreements decreased to $736,000 from $2,035,000 at the respective year ends 2016 and 2015.
Stockholders’ equity increased $21,182,000, or 9.48%, in 2016, due to net earnings and the issuance of stock pursuant to the Company’s Dividend Reinvestment Plan, offset by dividends paid on the Company’s common stock and changes in unrealized losses on available-for-sale securities. The change in stockholders’ equity includes a $3,232,000 increase in net unrealized losses on available-for-sale securities, net of taxes during the period. A more detailed discussion of assets, liabilities and capital follows.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Loans:
Loan category amounts and the percentage of loans in each category to total loans are as follows:
December 31, 2016 | December 31, 2015 | ||||||||||||
(Dollar Amounts in Thousands) | (Dollar Amounts in Thousands) | ||||||||||||
AMOUNT | PERCENTAGE | AMOUNT | PERCENTAGE | ||||||||||
Commercial, financial and agricultural | $ | 48,294 | 2.9 | % | $ | 41,339 | 2.8 | % | |||||
Installment and other | 44,274 | 2.6 | 43,467 | 3.0 | |||||||||
Real estate – mortgage | 1,264,277 | 74.5 | 1,110,989 | 75.5 | |||||||||
Real estate – construction | 339,580 | 20.0 | 275,319 | 18.7 | |||||||||
TOTAL | $ | 1,696,425 | 100.0 | % | $ | 1,471,114 | 100.0 | % | |||||
Loans are the largest component of the Company’s assets and are its primary source of income. The Company’s loan portfolio, net of allowance for loan losses, increased 15.51% at year end 2016 when compared to year end 2015. The loan portfolio is composed of four primary loan categories: commercial, financial and agricultural; installment and other; real estate-mortgage; and real estate-construction. The table above sets forth the loan categories and the percentage of such loans in the portfolio as of December 31, 2016 and 2015.
As represented in the table, Wilson Bank experienced loan growth for the year ended December 31, 2016 in all loan categories. Real estate mortgage loans increased 13.80% in 2016 and comprised 74.5% of the total loan portfolio at December 31, 2016, compared to 75.5% at December 31, 2015. Management believes the increase in real estate mortgage loans was primarily due to the continued favorable interest rate environment, favorable population growth in the Company’s market areas, and the Company’s ability to increase its market share of such loans while maintaining its loan underwriting standards. Installment loans increased 1.86% in 2016 and comprised 2.6% of the total loan portfolio at December 31, 2016, compared to 3.0% at December 31, 2015. Commercial, financial, and agricultural loans increased 16.82% in 2016 and comprised 2.9% of the total loan portfolio at December 31, 2016, compared to 2.8% at December 31, 2015. Real estate construction loans increased 23.34% in 2016 and comprised 20.0% of the portfolio at December 31, 2016, compared to 18.7% at December 31, 2015. The increase in real estate construction loans during 2016 reflected the overall increase in demand for such loans in the overall economy and the Company’s market. Because of the increase in the construction portfolio, Wilson Bank has implemented an additional layer of monitoring as it seeks to avoid advancing funds that exceed the present value of the collateral securing the loan. The responsibility for monitoring percentage of completion and distribution of funds tied to these completion percentages are now monitored and administered by a credit administration department independent of the lending function. Wilson Bank continues to seek to diversity its real estate portfolio to avoid having concentrations in any one type of loan.
Banking regulators define highly leveraged transactions to include leveraged buy-outs, acquisition loans and recapitalization loans of an existing business. Under the regulatory definition, at December 31, 2016, the Company had no highly leveraged transactions, and there were no foreign loans outstanding during any of the reporting periods. As of December 31, 2016, the Company had not underwritten any loans in connection with capital leases.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following tables present the Company’s nonaccrual loans and past due loans as of December 31, 2016 and December 31, 2015.
Loans on Nonaccrual Status | In Thousands | ||||||
2016 | 2015 | ||||||
Residential 1-4 family | $ | — | $ | 41 | |||
Multifamily | — | — | |||||
Commercial real estate | 3,255 | 4,293 | |||||
Construction | — | — | |||||
Farmland | 310 | 575 | |||||
Second mortgages | — | — | |||||
Equity lines of credit | — | — | |||||
Commercial | — | — | |||||
Agricultural, installment and other | — | — | |||||
Total | $ | 3,565 | $ | 4,909 | |||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands) | ||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Nonaccrual and Greater than 90 Days Past Due | Past Due | Current | Loans | Loans Greater Than 90 Days Past Due and Accruing Interest | ||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||
Residential 1-4 family | $ | 3,311 | 1,307 | 1,434 | 6,052 | 370,820 | 376,872 | $ | 1,434 | |||||||||||||
Multifamily | — | — | — | — | 79,908 | 79,908 | — | |||||||||||||||
Commercial real estate | 41 | 175 | 3,335 | 3,551 | 701,256 | 704,807 | 80 | |||||||||||||||
Construction | 1,872 | 53 | 22 | 1,947 | 337,633 | 339,580 | 22 | |||||||||||||||
Farmland | 56 | 1,163 | 410 | 1,629 | 35,890 | 37,519 | 100 | |||||||||||||||
Second mortgages | 177 | — | 11 | 188 | 8,978 | 9,166 | 11 | |||||||||||||||
Equity lines of credit | 40 | 148 | 17 | 205 | 55,800 | 56,005 | 17 | |||||||||||||||
Commercial | 37 | 4 | — | 41 | 37,636 | 37,677 | — | |||||||||||||||
Agricultural, installment and other | 385 | 85 | 143 | 613 | 54,278 | 54,891 | 143 | |||||||||||||||
Total | $ | 5,919 | 2,935 | 5,372 | 14,226 | 1,682,199 | 1,696,425 | $ | 1,807 | |||||||||||||
December 31, 2015 | ||||||||||||||||||||||
Residential 1-4 family | $ | 3,272 | 1,198 | 1,412 | 5,882 | 343,749 | 349,631 | $ | 1,371 | |||||||||||||
Multifamily | — | — | — | — | 49,564 | 49,564 | — | |||||||||||||||
Commercial real estate | 172 | — | 4,293 | 4,465 | 621,158 | 625,623 | — | |||||||||||||||
Construction | 958 | 230 | — | 1,188 | 274,131 | 275,319 | — | |||||||||||||||
Farmland | 88 | 21 | 886 | 995 | 31,119 | 32,114 | 311 | |||||||||||||||
Second Mortgages | 87 | — | 4 | 91 | 7,460 | 7,551 | 4 | |||||||||||||||
Equity Lines of Credit | 283 | 89 | 197 | 569 | 45,937 | 46,506 | 197 | |||||||||||||||
Commercial | 2 | — | 39 | 41 | 30,496 | 30,537 | 39 | |||||||||||||||
Agricultural, installment and other | 382 | 114 | 56 | 552 | 53,717 | 54,269 | 56 | |||||||||||||||
Total | $ | 5,244 | 1,652 | 6,887 | 13,783 | 1,457,331 | 1,471,114 | $ | 1,978 | |||||||||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-performing loans, which include nonaccrual loans and loans 90 days past due, totaled $5,372,000 at December 31, 2016, a decrease from $6,887,000 at December 31, 2015, resulting from a $1,344,000, or 27.38%, decrease in nonaccrual loans and a $171,000, or 8.65%, decrease in 90 day past due and accruing loans. The decrease in non-performing loans during the year ended December 31, 2016 of $1,151,000 was due primarily to a decrease in non-performing commercial real estate mortgage loans of $4,274,000, offset in part by an increase of non-performing residential 1-4 family real estate loans of $958,000. The decrease in non-performing commercial real estate mortgage loans resulted primarily from one large commercial real estate loan in nonaccrual status that was paid off and another loan that was partially paid off. Nonaccrual loans are loans on which interest is no longer accrued because management believes collection of such interest is doubtful due to management’s evaluation of the borrower’s financial condition, collateral liquidation value, economic and business conditions and other factors affecting the borrower’s ability to pay. Nonaccrual loans totaled $3,565,000 at December 31, 2016, compared to $4,909,000 at December 31, 2015. The decrease in nonaccrual loans relates primarily to a decrease in nonaccrual commercial real estate mortgage loans of $1,038,000 reflected in the above-described decrease in non-performing loans within that category that resulted primarily from one large commercial real estate loan in nonaccrual status that was paid off and another nonaccrual loan that was partially paid off. Management believes that it is probable that it will incur losses on nonperforming loans but believes that these losses should not exceed the amount in the allowance for loan losses already allocated to these loans, unless there is a deterioration of local real estate values.
At December 31, 2016, the Company had one impaired loan totaling $2,988,000 which was on non accruing interest status. At December 31, 2015, the Company had three impaired loans of $4,868,000 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 (including loans on nonaccrual status and loans past due 90 days or more) at December 31, 2016 and December 31, 2015.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In Thousands | |||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||
December 31, 2016 | |||||||||||||||
With no related allowance recorded: | |||||||||||||||
Residential 1-4 family | $ | 150 | 148 | — | 150 | 7 | |||||||||
Multifamily | — | — | — | — | — | ||||||||||
Commercial real estate | 4,248 | 4,246 | — | 4,352 | 38 | ||||||||||
Construction | 1,623 | 1,618 | — | 1,778 | 82 | ||||||||||
Farmland | 104 | 103 | — | 79 | 5 | ||||||||||
Second mortgages | — | — | — | — | — | ||||||||||
Equity lines of credit | — | — | — | — | — | ||||||||||
Commercial | — | — | — | — | — | ||||||||||
Agricultural, installment, and other | — | — | — | — | — | ||||||||||
$ | 6,125 | 6,115 | — | 6,359 | 132 | ||||||||||
With allowance recorded: | |||||||||||||||
Residential 1-4 family | $ | 540 | 531 | 196 | 540 | 32 | |||||||||
Multifamily | — | — | — | — | — | ||||||||||
Commercial real estate | 443 | 443 | 120 | 111 | 5 | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Farmland | — | — | — | — | — | ||||||||||
Second mortgages | — | — | — | — | — | ||||||||||
Equity lines of credit | — | — | — | — | — | ||||||||||
Commercial | — | — | — | — | — | ||||||||||
Agricultural, installment, and other | — | — | — | — | — | ||||||||||
$ | 983 | 974 | 316 | 651 | 37 | ||||||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total | |||||||||||||||
Residential 1-4 family | $ | 690 | 679 | 196 | 690 | 39 | |||||||||
Multifamily | — | — | — | — | — | ||||||||||
Commercial real estate | 4,691 | 4,689 | 120 | 4,463 | 43 | ||||||||||
Construction | 1,623 | 1,618 | — | 1,778 | 82 | ||||||||||
Farmland | 104 | 103 | — | 79 | 5 | ||||||||||
Second mortgages | — | — | — | — | — | ||||||||||
Equity lines of credit | — | — | — | — | — | ||||||||||
Commercial | — | — | — | — | — | ||||||||||
Agricultural, installment and other | — | — | — | — | — | ||||||||||
$ | 7,108 | 7,089 | 316 | 7,010 | 169 | ||||||||||
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 | ||||||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A loan is considered impaired, in accordance with the impairment accounting guidance of FASB ASC 310, when the current net worth and financial capacity of the borrower or of the collateral pledged, if any, is viewed as inadequate and it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. In those cases, such loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company shall recognize impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses.
The Company considers all loans subject to the provisions of FASB ASC 310 that are on nonaccrual status to be impaired. Loans are placed on nonaccrual status when doubt as to timely collection of principal or interest exists, or when principal or interest is past due 90 days or more unless such loans are well-secured and in the process of collection. Delays or shortfalls in loan payments are evaluated with various other factors to determine if a loan is impaired. Generally, delinquencies under 90 days are considered insignificant unless certain other factors are present which indicate impairment is probable. The decision to place a loan on nonaccrual status is also based on an evaluation of the borrower’s financial condition, collateral liquidation value, and other factors that affect the borrower’s ability to pay.
The Company also internally classifies loans which, although current, management questions the borrower’s ability to comply with the present repayment terms of the loan agreement. These internally classified loans totaled $16,158,000, inclusive of the Company’s non-performing loans, at December 31, 2016, as compared to $25,217,000 at December 31, 2015. Of the internally classified loans at December 31, 2016, $16,021,000 are real estate related loans (including loans to home builders and developers of land, commercial real estate, as well as multi family mortgage loans) and $137,000 are various other types of loans. These loans have been graded accordingly considering bankruptcies, inadequate cash flows and delinquencies. Management does not anticipate losses on these loans to exceed the amount already allocated to loan losses for these loans, unless there is a deterioration of local real estate values.
The internally classified loans as a percentage of the allowance for loan losses were 71.1% and 110.1%, respectively, at December 31, 2016 and 2015.
The Company’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. The concessions typically result from the Company’s loss mitigation activities and could include reduction 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. Because of Wilson Bank’s policy to consider a TDR as nonperforming until there has been at least six months of repayment performance, the addition of one large TDR in the last half of 2015 caused the nonperforming TDRs as of December 31, 2016 to decrease $1,802,000 when compared to 2015; however, overall TDR relationships increased. Total TDRs increased $492,000 from December 31, 2015 to December 31, 2016 due to several small loan relationships that were classified as TDRs in 2016.
The allowance for loan losses is discussed under “Critical Accounting Estimates” and “Provision for Loan Losses.” The Company maintains its allowance for loan losses at an amount believed by management to be adequate to provide for loan losses in the loan portfolio.
Substantially all of the Company’s loans are from Wilson, DeKalb, Smith, Putnam, Trousdale, Davidson, Rutherford and adjacent counties. Although the majority of the Company's loans are in the real estate market, the Company seeks to exercise prudent risk management in lending through the diversification by loan category within the real estate segment, including 1-4 family residential real estate, commercial real estate, multifamily, construction, second mortgages, farmland, and equity lines of credit. At December 31, 2016, no single industry segment accounted for more than 10% of the Company’s portfolio other than construction and real estate loans.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company’s management believes there is an opportunity to increase the loan portfolio in the Company’s primary market area in 2017 as economic conditions continue to improve. The Company will target commercial business lending, commercial and residential real estate lending and consumer lending as areas of emphasis in 2017. Although it is the Company’s objective to achieve a loan portfolio equal to approximately 85% of deposit balances, various factors, including demand for loans which meet its underwriting standards, will likely determine the size of the loan portfolio in a given economic climate. At December 31, 2016, the Company’s total loans equaled 87.0% of its total deposits. As a practice, the Company generates its own loans and does not buy participations from other institutions. The Company may sell portions of the loans it generates to other financial institutions for cash in order to improve the liquidity of the Company’s loan portfolio or extend its lending capacity.
Securities
Securities decreased 2.81% to $349,209,000 at December 31, 2016 from $359,323,000 at December 31, 2015, and comprised the second largest and other primary component of the Company’s earning assets. Securities decreased as the result of management’s decision to reinvest liquid funds in higher yielding assets and a decrease in the fair market value of available-for-sale securities. The average yield, excluding tax equivalent adjustment, of the securities portfolio at December 31, 2016 was 2.14% with a weighted average life of 6.09 years, as compared to an average yield of 2.16% and a weighted average life of 5.25 years at December 31, 2015. The weighted average lives on mortgage-backed securities reflect the repayment rate used for book value calculations.
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
No securities have been classified as trading securities.
The Company’s classification of securities as of December 31, 2016 and December 31, 2015 is as follows:
December 31, 2016 | December 31, 2016 | ||||||||||||||
(In Thousands) | Held-To-Maturity | Available-For-Sale | |||||||||||||
Amortized Cost | Estimated Market Value | Amortized Cost | Estimated Market Value | ||||||||||||
U.S. Government-sponsored enterprises (GSEs)* | $ | — | $ | — | $ | 61,879 | $ | 59,488 | |||||||
Mortgage-backed | |||||||||||||||
GSEs residential | 11,856 | 11,674 | 166,316 | 164,365 | |||||||||||
Asset-backed: | |||||||||||||||
SBAP | — | — | 37,577 | 36,857 | |||||||||||
Obligations of state and political | |||||||||||||||
subdivision | 24,768 | 24,471 | 53,429 | 51,875 | |||||||||||
$ | 36,624 | $ | 36,145 | $ | 319,201 | $ | 312,585 | ||||||||
* | Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, Federal Farm Credit Banks, and Government National Mortgage Association |
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
December 31, 2015 | December 31, 2015 | ||||||||||||||
(In Thousands) | Held-To-Maturity | Available-For-Sale | |||||||||||||
Amortized Cost | Estimated Market Value | Amortized Cost | Estimated Market Value | ||||||||||||
U.S. Government-sponsored enterprises (GSEs)* | $ | — | $ | — | $ | 77,177 | $ | 76,909 | |||||||
Mortgage-backed: | |||||||||||||||
GSE residential | 9,375 | 9,266 | 192,983 | 191,915 | |||||||||||
Asset-backed: | |||||||||||||||
SBAP | — | — | 31,253 | 31,034 | |||||||||||
Obligations of state and political | |||||||||||||||
Subdivision | 18,820 | 19,099 | 31,093 | 31,270 | |||||||||||
$ | 28,195 | $ | 28,365 | $ | 332,506 | $ | 331,128 | ||||||||
* | Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, Federal Farm Credit Banks, and Government National Mortgage Association |
The classification of a portion of the securities portfolio as available-for-sale was made to provide for more flexibility in asset/liability management and capital management.
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2016:
In Thousands, Except Number of Securities | |||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Number of Securities | Fair Value | Unrealized Losses | Number of Securities | Fair Value | Unrealized Losses | ||||||||||||||||||||||
Held to Maturity Securities: | |||||||||||||||||||||||||||||
Mortgage-backed: | |||||||||||||||||||||||||||||
GSE residential | $ | 8,177 | $ | 151 | 7 | $ | 1,704 | $ | 79 | 1 | $ | 9,881 | $ | 230 | |||||||||||||||
Obligations of states and political subdivisions | 16,081 | 439 | 41 | — | — | — | 16,081 | 439 | |||||||||||||||||||||
$ | 24,258 | $ | 590 | 48 | $ | 1,704 | $ | 79 | 1 | $ | 25,962 | $ | 669 | ||||||||||||||||
Available for Sale Securities: | |||||||||||||||||||||||||||||
GSEs | $ | 59,488 | $ | 2,391 | 23 | $ | — | $ | — | — | $ | 59,488 | $ | 2,391 | |||||||||||||||
Mortgage-backed: | |||||||||||||||||||||||||||||
GSE residential | 124,011 | 2,350 | 64 | 6,918 | 97 | 9 | 130,929 | 2,447 | |||||||||||||||||||||
Asset-backed: | |||||||||||||||||||||||||||||
SBAP | 33,579 | 729 | 17 | — | — | — | 33,579 | 729 | |||||||||||||||||||||
Obligations of states and political subdivisions | 42,801 | 1,606 | 116 | — | — | — | 42,801 | 1,606 | |||||||||||||||||||||
$ | 259,879 | $ | 7,076 | 220 | $ | 6,918 | $ | 97 | 9 | $ | 266,797 | $ | 7,173 | ||||||||||||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The impaired securities are considered high quality investments in line with normal industry investing practices. The unrealized losses are primarily the result of changes in the interest rate and sector environments. Impaired securities are assessed quarterly for the presence of other-than-temporary impairment (“OTTI”). A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security. To determine whether OTTI has occurred, management considers factors such as (1) length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for an anticipated recovery in fair value. If management deems a security to be OTTI, management reviews the present value of the future cash flows associated with the security. A shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss. If a credit loss is identified, the credit loss is recognized in that period as a charge to earnings and a new cost basis for the security is established. If management concludes that no credit loss exists and it is not more-likely-than-not that it will be required to sell the security before the recovery of the security’s cost basis, then the security is not deemed OTTI and the shortfall is recorded as a component of equity. Accordingly, as of December 31, 2016, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated income statement.
Deposits
The increases in assets in 2016 and 2015 were funded primarily by increases in deposits, decrease in fed funds sold, and the Company’s earnings. Total deposits, which are the principal source of funds for the Company, totaled $1,942,135,000 at December 31, 2016 compared to $1,789,850,000 at December 31, 2015. The Company has targeted local consumers, professionals and small businesses as its central clientele; therefore, deposit instruments in the form of demand deposits, savings accounts, money market demand accounts, certificates of deposits and individual retirement accounts are offered to customers. Management believes the Wilson County, Davidson County, DeKalb County, Putnam County, Smith County, Sumner County, Rutherford County and Trousdale County areas are attractive economic markets offering growth opportunities for the Company; however, the Company competes with several larger banks and community banks that have bank offices in these counties which may negatively impact market growth or maintenance of current market share. Even though the Company is in a very competitive market, management currently believes that its market share can be maintained or expanded.
The $152,285,000, or 8.51%, growth in deposits in 2016 was due to a $104,426,000, or 19.93%, increase in money market accounts,a $8,520,000, or 1.91%, increase in NOW accounts, a $29,909,000, or 15.18%, increase in demand deposit accounts and a $15,920,000, or 14.76%, increase in savings accounts, offset in part by a decrease in certificates of deposits (including individual retirement accounts) of $6,490,000 or 1.26%. The average rate paid on average total interest-bearing deposits was 0.50% for 2016, compared to 0.56% for 2015, reflecting a reduction in short-term interest rates and a shift in deposits to lower paying transaction and money market accounts from certificates of deposit. The average rate paid in 2014 was 0.67%. Competitive pressure from other banks in our market area relating to deposit pricing continues to adversely affect the rates paid on deposit accounts as it limits our ability to more fully reduce deposit rates in line with short-term rates. The ratio of average loans to average deposits was 84.0% in 2016, 82.7% in 2015, and 78.7% in 2014. The Company anticipates that during 2017 deposits will continue to shift to money market or savings accounts due to the current rate environment notwithstanding the slight rate increase initiated by the Federal Reserve in late 2016 that we contemplate may continue in 2017.
Contractual Obligations
The Company’s contractual obligations at December 31, 2016 are as follows:
(In Thousands) | Less than 1 Year | 1 –3 Years | 3-5 Years | More than 5 Years | Total | ||||||||||||||
Long-Term Debt | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Operating Leases | 244 | 440 | 391 | — | 1,075 | ||||||||||||||
Purchases | — | — | — | — | — | ||||||||||||||
Other Long-Term | |||||||||||||||||||
liabilities | — | — | — | — | — | ||||||||||||||
Total | $ | 244 | $ | 440 | $ | 391 | $ | — | $ | 1,075 | |||||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Long-term debt contractual obligations would typically include advances from the Federal Home Loan Bank, but at December 31, 2016, the Company had no such advances. The Company leases land for certain branch facilities and automatic teller machine locations. Future minimum rental payments required under the terms of these non-cancellable leases are included in operating lease obligations.
Off Balance Sheet Arrangements
At December 31, 2016, the Company had unfunded lines of credit of $484 million and outstanding standby letters of credit of $51 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company’s bank subsidiary has the ability to liquidate Federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase Federal funds from other financial institutions. Additionally, the Company’s bank subsidiary could sell participations in these or other loans to correspondent banks. As mentioned below, Wilson Bank has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments, its investment security maturities, and short-term borrowings.
Liquidity and Asset Management
The Company’s management seeks to maximize net interest income by managing the Company’s assets and liabilities within appropriate constraints on capital, liquidity and interest rate risk. Liquidity is the ability to maintain sufficient cash levels necessary to fund operations, meet the requirements of depositors and borrowers and fund attractive investment opportunities. Higher levels of liquidity bear corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher interest expense involved in extending liability maturities. Liquid assets include cash and cash equivalents, investment securities and money market instruments that will mature within one year. At December 31, 2016, the Company’s liquid assets totaled approximately $165 million.
The Company maintains a formal asset and liability management process to quantify, monitor and control interest rate risk, and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.
Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in market conditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income can not be precisely estimated nor can the impact of higher or lower interest rates on net interest income be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management’s strategies, among other factors.
The Company’s primary source of liquidity is a stable core deposit base. In addition, short-term borrowings, loan payments and investment security maturities provide a secondary source. At December 31, 2016, the Company had a liability sensitive position (a negative gap). Liability sensitivity means that more of the Company’s liabilities are capable of re-pricing over certain time frames than its assets. The interest rates associated with these liabilities may not actually change over this period but are capable of changing.
Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company meets quarterly to analyze its rate sensitivity position. These meetings focus on the spread between the Company’s cost of funds and interest yields generated primarily through loans and investments.
The Company’s securities portfolio consists of earning assets that provide interest income. For those securities classified as held-to-maturity, the Company has the ability and intent to hold these securities to maturity or on a long-term basis. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rates, prepayment risk, the need or desire to increase capital and similar economic
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
factors. At December 31, 2016, securities totaling approximately $28.8 million mature or will be subject to rate adjustments within the next twelve months.
A secondary source of liquidity is the Company’s loan portfolio. At December 31, 2016, loans totaling approximately $512 million either will become due or will be subject to rate adjustments within twelve months from that date. Continued emphasis will be placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit and individual retirement accounts of $100,000 or greater totaling approximately $120 million will become due or reprice during the next twelve months. Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit accounts and regular savings accounts. Management anticipates that there will be no significant withdrawals from these accounts in 2017.
The following table shows the rate sensitivity gaps for different time periods as of December 31, 2016:
Interest Rate Sensitivity Gaps
(In Thousands) | 1-90 Days | 91-180 Days | 181-365 Days | One Year And Longer | Total | ||||||||||
Interest-earning assets | $ | 276,466 | 92,123 | 207,555 | 1,480,684 | 2,056,828 | |||||||||
Interest-bearing liabilities | (1,287,130 | ) | (71,243 | ) | (95,011 | ) | (262,516 | ) | (1,715,900 | ) | |||||
Interest-rate sensitivity gap | $ | (1,010,664 | ) | 20,880 | 112,544 | 1,218,168 | 340,928 | ||||||||
Cumulative gap | $ | (1,010,664 | ) | (989,784 | ) | (877,240 | ) | 340,928 | |||||||
The Company also uses simulation modeling to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. The Asset Liability Committee meets quarterly to analyze the interest rate shock simulation. The interest rate simulation model is based on a number of assumptions. The assumptions relate primarily to loan and deposit growth, asset and liability prepayments, the call features of investment securities, interest rates and balance sheet management strategies. The Company also uses Economic Value of Equity (“EVE”) sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Presented below is the estimated impact on Wilson Bank’s net interest income and EVE as of December 31, 2016, assuming an immediate shift in interest rates:
% Change from Base Case for Immediate Parallel Changes in Rates | ||||||||
-100 BP(1) | +100 BP | +200 BP | ||||||
Net interest income | (3.13 | )% | (3.79 | )% | (7.88 | )% | ||
EVE | (7.30 | ) | (0.49 | ) | (2.08 | ) | ||
(1) Because certain current short-term interest rates are at or below 1.00%, the 100 basis points downward shock assumes that certain corresponding interest rates reflect a decrease of less than the full 100 basis point downward shock.
Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. At the present time there are no other known trends or any known commitments, demands, events or uncertainties that will result in, or that are reasonably likely to result in, the Company’s liquidity changing in a materially adverse way.
Capital Resources, Capital Position and Dividends
At December 31, 2016, total stockholders’ equity was $244,620,000, or 11.13% of total assets, which compares with $223,438,000, or 11.05% of total assets, at December 31, 2015, and $200,892,000, or 10.72% of total assets, at December 31, 2014. The dollar
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
increase in the Company’s stockholders’ equity during 2016 reflects (i) net income of $25,633,000 less cash dividends of $0.56 per share totaling $5,756,000, (ii) the issuance of 98,318 shares of common stock for $4,316,000, as reinvestment of cash dividends, (iii) the issuance of 5,120 shares of common stock pursuant to exercise of stock options for $152,000, (iv) the net unrealized loss on available-for-sale securities of $3,232,000, and (v) a stock based compensation expense of $69,000.
The Company and the Bank are subject to regulatory capital requirements administered by the FDIC, the Federal Reserve and the Tennessee Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Wilson Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2016 and December 31, 2015, the Company and the Bank are considered to be “well-capitalized” under applicable regulatory definitions.
As of December 31, 2016, the most recent notification from the FDIC categorized Wilson Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized for prompt corrective action regualtions as of December 31, 2016 and December 31, 2015, an institution was required to maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk based and Tier 1 leverage ratios as set forth in the following tables and not be subject to a written agreement, order or directive to maintain a specific capital level. There are no conditions or events since the notification that management believes have changed Wilson Bank’s category. The Company’s and Wilson Bank’s actual capital amounts and ratios as of December 31, 2016 and 2015, are presented in the following table (dollar amounts in thousands):
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Actual | Minimum Capital Requirements | Minimum To Be Well Capitalized Under Applicable Prompt Corrective Action Regulatory Provisions | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | $ | 266,954 | 12.7 | % | $ | 181,298 | 8.625 | % | N/A | N/A | ||||||||||
Wilson Bank | 265,142 | 12.6 | 181,496 | 8.625 | $ | 210,430 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 243,897 | 11.6 | 139,295 | 6.625 | N/A | N/A | ||||||||||||||
Wilson Bank | 242,085 | 11.5 | 139,462 | 6.625 | 168,407 | 8.0 | ||||||||||||||
Common equity Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 243,897 | 11.6 | 107,756 | 5.125 | N/A | N/A | ||||||||||||||
Wilson Bank | 242,085 | 11.5 | 107,886 | 5.125 | 136,831 | 6.5 | ||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||
Consolidated | 243,897 | 11.2 | 87,106 | 4.0 | N/A | N/A | ||||||||||||||
Wilson Bank | 242,085 | 11.1 | 87,238 | 4.0 | 109,047 | 5.0 | ||||||||||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Actual | Minimum Capital Requirements | Minimum To Be Well Capitalized Under Applicable Prompt Corrective Action Regulatory Provisions | ||||||||||||||||||
December 31, 2015 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | $ | 240,848 | 14.1 | % | $ | 136,588 | 8.0 | % | N/A | N/A | ||||||||||
Wilson Bank | 238,963 | 14.0 | 136,575 | 8.0 | $ | 170,719 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 219,483 | 12.9 | 102,441 | 6.0 | N/A | N/A | ||||||||||||||
Wilson Bank | 217,600 | 12.8 | 102,431 | 6.0 | 136,575 | 8.0 | ||||||||||||||
Common equity Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 219,483 | 12.9 | 76,831 | 4.5 | N/A | N/A | ||||||||||||||
Wilson Bank | 217,600 | 12.8 | 76,823 | 4.5 | 110,967 | 6.5 | ||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||
Consolidated | 219,483 | 11.1 | 79,361 | 4.0 | N/A | N/A | ||||||||||||||
Wilson Bank | 217,600 | 11.0 | 79,354 | 4.0 | 99,192 | 5.0 | ||||||||||||||
In July 2013, the Federal banking regulators, in response to the Statutory Requirements of The Dodd-Frank Act, adopted new regulations implementing the Basel Capital Adequacy Accord (“Basel III”) and the related higher minimum capital ratios. The new capital requirements were effective beginning January 1, 2015 and include a new “Common Equity Tier I Ratio”, which has stricter rules as to what qualifies as Common Equity Tier I Capital.
The guidelines under Basel III establish a 2.5% capital conservation buffer requirement that is phased in over four years beginning January 1, 2016. The buffer is related to Risk Weighted Assets. In order to avoid limitations on capital distributions such as dividends and certain discretionary bonus payments to executive officers, a banking organization must maintain capital ratios above the minimum ratios including the buffer. The Basel III minimum requirements after giving effect to the buffer as of January 1, of each year presented are as follows:
2016 | 2017 | 2018 | 2019 | ||||||||
Common Equity Tier I Ratio | 5.125 | % | 5.75 | % | 6.375 | % | 7.0 | % | |||
Tier I Capital to Risk Weighted Assets Ratio | 6.625 | % | 7.25 | % | 7.875 | % | 8.5 | % | |||
Total Capital to Risk Weighted Assets Ratio | 8.625 | % | 9.25 | % | 9.875 | % | 10.5 | % | |||
The requirements of Basel III also place more restrictions on the inclusion of deferred tax assets and capitalized mortgage servicing rights as a percentage of Tier I Capital. In addition, the risk weights assigned to certain assets such as past due loans and certain real estate loans have been increased.
The requirements of Basel III allowed banks and bank holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and Wilson Bank have opted out of this requirement.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The application of these more stringent capital requirements to the Company and Wilson Bank could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if the Company and Wilson Bank were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of the final rules regarding Basel III could result in the Company or Wilson Bank having to lengthen the term of their funding, restructure their business models and/or increase their holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit the Company’s and Wilson Bank’s ability to make distributions, including paying dividends or buying back shares.
Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both short term and long term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company meets quarterly to analyze the rate sensitivity position. These meetings focus on the spread between the cost of funds and interest yields generated primarily through loans and investments.
The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates as of December 31, 2016.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in Thousands) Expected Maturity Date—Year Ending December 31, | ||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | Fair Value | |||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Loans, net of unearned interest: | ||||||||||||||||||||||||
Variable rate | $ | 33,547 | 26,977 | 16,857 | 16,243 | 33,214 | 1,052,027 | 1,178,865 | 1,178,865 | |||||||||||||||
Average interest rate | 4.55 | % | 4.45 | % | 4.63 | % | 4.64 | % | 4.49 | % | 4.38 | % | 4.39 | % | ||||||||||
Fixed rate | $ | 211,142 | 94,626 | 43,547 | 30,095 | 26,165 | 111,985 | 517,560 | 524,040 | |||||||||||||||
Average interest rate | 4.14 | % | 4.55 | % | 5.04 | % | 4.78 | % | 4.39 | % | 4.20 | % | 4.35 | % | ||||||||||
Securities | $ | 2,605 | 4,442 | 6,895 | 7,223 | 11,120 | 316,924 | 349,209 | 348,730 | |||||||||||||||
Average interest rate | 3.35 | % | 1.29 | % | 1.72 | % | 1.57 | % | 1.67 | % | 1.96 | % | 2.14 | % | ||||||||||
Loans held for sale | $ | 14,788 | — | — | — | — | — | 14,788 | 14,788 | |||||||||||||||
Average interest rate | 3.20 | % | — | — | — | — | — | 3.20 | % | |||||||||||||||
Federal funds sold | — | — | — | — | — | — | — | — | ||||||||||||||||
Average interest rate | — | — | — | — | — | — | — | |||||||||||||||||
Interest-bearing deposits | $ | 1,452,649 | 131,358 | 76,942 | 34,783 | 19,432 | — | 1,715,164 | 1,460,812 | |||||||||||||||
Average interest rate | 0.36 | % | 1.03 | % | 1.20 | % | 1.56 | % | 1.58 | % | — | 0.48 | % | |||||||||||
Securities sold under repurchase agreements | $ | 736 | — | — | — | — | — | 736 | 736 | |||||||||||||||
Average interest rate | 0.25 | % | — | — | — | — | — | 0.25 | % | |||||||||||||||
Impact of Inflation
Although interest rates are significantly affected by inflation, for the fiscal years ended December 31, 2016, 2015, and 2014, the inflation rate is believed to have had an immaterial impact on the Company’s results of operations.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Disclosures About Fair Value of Financial Instruments
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement and not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.
Valuation Hierarchy
FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• | Level 1-inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
• | Level 2-inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
• | Level 3-inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Assets
Securities available-for-sale-Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.
Impaired loans-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 agreement. 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 less selling costs if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower’s underlying financial condition.
Other real estate owned-Other real estate owned (“OREO”) represents real estate foreclosed upon by the Company through loan defaults by customers or acquired in lieu of foreclosure. Substantially all of these amounts relate to lots, homes and development projects that are either completed or are in various stages of construction for which the Company believes it has adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value. Appraisal values are property-specific and sensitive to the changes in the overall economic environment.
Other assets-Included in other assets are certain assets carried at fair value, including the cash surrender value of bank owned life insurance policies. The Company uses financial information received from insurance carriers indicating the performance of the insurance policies and cash surrender values in determining the carrying value of life insurance. The Company reflects these assets within Level 3 of the valuation hierarchy due to the unobservable inputs included in the valuation of these items. The Company does not consider the fair values of these policies to be materially sensitive to changes in these unobservable inputs.
Mortgage loans held-for-sale-Mortgage loans held-for-sale are carried at their fair value. The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.
The following tables present the financial instruments carried at fair value as of December 31, 2016 and December 31, 2015, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):
Measured on a Recurring Basis | ||||||||||||
Total Carrying Value in the Consolidated Balance Sheet | Quoted Market Prices in an Active Market (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Models with Significant Unobservable Market Parameters (Level 3) | |||||||||
December 31, 2016 | ||||||||||||
Investment securities available-for-sale: | ||||||||||||
U.S. Government sponsored enterprises | $ | 59,488 | — | 59,488 | — | |||||||
Mortgage-backed securities | 164,365 | — | 164,365 | — | ||||||||
Asset-backed securities | 36,857 | — | 36,857 | — | ||||||||
State and municipal securities | 51,875 | — | 51,875 | — | ||||||||
Total investment securities available-for-sale | $ | 312,585 | — | 312,585 | — | |||||||
Loans held for sale | 14,788 | — | 14,788 | — | ||||||||
Other assets | 28,616 | — | — | 28,616 | ||||||||
Total assets at fair value | $ | 355,989 | — | 327,373 | 28,616 | |||||||
December 31, 2015 | ||||||||||||
Investment securities available-for-sale: | ||||||||||||
U.S. Government sponsored enterprises | $ | 76,909 | — | 76,909 | — | |||||||
Mortgage-backed securities | 191,915 | — | 191,915 | — | ||||||||
Asset-backed securities | 31,034 | — | 31,034 | — | ||||||||
State and municipal securities | 31,270 | — | 31,270 | — | ||||||||
Total investment securities available-for-sale | $ | 331,128 | — | 331,128 | — | |||||||
Loans held for sale | 10,135 | — | 10,135 | — | ||||||||
Other assets | 26,672 | — | — | 26,672 | ||||||||
Total assets at fair value | $ | 367,935 | — | 341,263 | 26,672 | |||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Measured on a Non-recurring basis | ||||||||||||
Total Carrying Value in the Consolidated Balance Sheet | Quoted Market Active Market (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Models with Significant Unobservable Market Parameters (Level 3) | |||||||||
December 31, 2016 | ||||||||||||
Other real estate owned | $ | 4,527 | — | — | 4,527 | |||||||
Impaired loans, net (¹) | 6,792 | — | — | 6,792 | ||||||||
Total | $ | 11,319 | — | — | 11,319 | |||||||
December 31, 2015 | ||||||||||||
Other real estate owned | $ | 5,410 | — | — | 5,410 | |||||||
Impaired loans, net (¹) | 8,436 | — | — | 8,436 | ||||||||
Total | $ | 13,846 | — | — | 13,846 | |||||||
(1) Amount is net of a valuation allowance of $316,000 at December 31, 2016 and $194,000 at December 31, 2015 as required by ASC 310, “Receivables.”
In the case of the investment securities portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the twelve months ended December 31, 2016, there were no transfers between Levels 1, 2 or 3.
The table below includes a roll forward of the balance sheet amounts for the year ended December 31, 2016 and December 31, 2015 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):
For the Twelve Months Ended December 31, | |||||||||||||
2016 | 2015 | ||||||||||||
Other Assets | Other Liabilities | Other Assets | Other Liabilities | ||||||||||
Fair value, January 1 | $ | 17,733 | — | $ | 13,344 | — | |||||||
Total realized gains included in income | 673 | — | 532 | — | |||||||||
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at December 31 | — | — | — | — | |||||||||
Purchases, issuances and settlements, net | 10,210 | — | 3,857 | — | |||||||||
Transfers out of Level 3 | — | — | — | — | |||||||||
Fair value, December 31 | $ | 28,616 | — | $ | 17,733 | — | |||||||
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at December 31 | $ | 673 | — | $ | 532 | — | |||||||
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2016 and December 31, 2015. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Held-to-maturity securities-Estimated fair values for held-to-maturity investment securities are based on quoted market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics.
Loans-The fair value of our loan portfolio includes a credit risk factor in the determination of the fair value of our loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Our loan portfolio is initially fair valued using a segmented approach. We divide our loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk.
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exit price.
Deposits and Securities sold under agreements to repurchase- Fair values for deposits are estimated using discounted cash flow models, using current market interest rates offered on deposits with similar remaining maturities.
Off-Balance Sheet Instruments-The fair values of the Company’s off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to the Company until such commitments are funded.
The following table presents the carrying amounts, estimated fair value and placement in the fair value hierarchy of the Company’s financial instruments at December 31, 2016 and December 31, 2015. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(in Thousands) | Carrying/ Notional Amount | Estimated Fair Value(¹) | Quoted Market Prices in an Active Market (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Models with Significant Unobservable Market Parameters (Level 3) | ||||||||||
December 31, 2016 | |||||||||||||||
Financial assets: | |||||||||||||||
Securities held-to-maturity | $ | 36,624 | 36,145 | — | 36,145 | — | |||||||||
Loans, net | 1,667,088 | 1,673,568 | — | — | 1,673,568 | ||||||||||
Financial liabilities: | |||||||||||||||
Deposits and securities sold under agreements to repurchase | 1,942,871 | 1,631,032 | — | — | 1,631,032 | ||||||||||
Off-balance sheet instruments: | |||||||||||||||
Commitments to extend credit | — | — | — | — | — | ||||||||||
Standby letters of credit | — | — | — | — | — | ||||||||||
December 31, 2015 | |||||||||||||||
Financial assets: | |||||||||||||||
Securities held-to-maturity | $ | 28,195 | 28,365 | — | 28,365 | — | |||||||||
Loans, net | 1,443,179 | 1,443,738 | — | — | 1,443,738 | ||||||||||
Financial liabilities: | |||||||||||||||
Deposits and securities sold under agreements to repurchase | 1,791,885 | 1,549,414 | — | — | 1,549,414 | ||||||||||
Off-balance sheet instruments: | |||||||||||||||
Commitments to extend credit | — | — | — | — | — | ||||||||||
Standby letters of credit | — | — | — | — | — | ||||||||||
(1) Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a market-participant would realize in a hypothetical orderly transaction.
Impact of New Accounting Standards
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date" deferred the effective date of ASU 2014-09 by one year to January 1, 2018. We are currently evaluating the potential impact of ASU 2014-09 on our financial statements.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, 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 (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.
ASU 2016-02,“Leases (Topic 842)” ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the potential impact of ASU 2016-02 on our financial statements.
ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. We elected to adopt the provisions of ASU 2016-09 during the first quarter of 2016 in advance of the required application date of January 1, 2017.
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.
ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.
WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
There were no other recently issued accounting pronouncements that are expected to materially impact the Company.
Holding Company & Stock Information
Wilson Bank Holding Company Directors
James F. Comer, Chairman; Randall Clemons; Charles Bell; Jack Bell; Jerry Franklin; John Freeman; William Jordan; James Anthony Patton; and Elmer Richerson.
Common Stock Market Information
The common stock of Wilson Bank Holding Company is not traded on an exchange nor is there a known active trading market. The number of stockholders of record at February 6, 2017 was 3,920. Based solely on information made available to the Company from limited numbers of buyers and sellers, the Company believes that the following table sets forth the quarterly range of sale prices for the Company’s stock during the years 2015 and 2016. *The information set forth below has been adjusted to reflect a four for three stock split for shareholders as of record as of March 24, 2016.
Stock Prices
2015 | High | Low | |||||
First Quarter | $ | 36.26 | $ | 35.81 | |||
Second Quarter | $ | 36.71 | $ | 36.26 | |||
Third Quarter | $ | 37.16 | $ | 36.71 | |||
Fourth Quarter | $ | 37.62 | $ | 37.16 | |||
2016 | High | Low | |||||
First Quarter | $ | 39.25 | $ | 37.62 | |||
Second Quarter | $ | 42.25 | * | $ | 39.25 | ||
Third Quarter | $ | 40.25 | $ | 39.75 | |||
Fourth Quarter | $ | 55.00 | * | $ | 40.25 | ||
*Represents one transaction of 50 shares during the second quarter and one transaction of 294 shares during the fourth quarter of which the company is aware where the sale prices was at least $2.50 higher than any other trade during the quarter. The volume weighted average stock price during the second quarter was $39.28 and the volume weighted stock price during the fourth quarter was $40.62. | |||||||
On January 1, 2015, a $.30 per share cash dividend was declared and on July 1, 2015 a $.35 per share cash dividend was declared and paid to shareholders of record on those dates. On January 1, 2016, a $.35 per share cash dividend was declared and on July 1, 2016, a $.30 per share cash dividend was declared and paid to shareholders of record on those dates. Future dividends will be dependent upon the Company’s profitability, its capital needs, overall financial condition, economic and regulatory consideration.
Annual Meeting and Information Contacts
The Annual Meeting of Shareholders will be held in the Main Office of Wilson Bank Holding Company at 7:00 P.M., April 11, 2017 at 623 West Main Street, Lebanon, Tennessee.
For further information concerning Wilson Bank Holding Company or Wilson Bank & Trust, or to obtain a copy of the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission, which is available without charge to shareholders, please contact Lisa Pominski, CFO, Wilson Bank & Trust, P.O. Box 768, Lebanon, Tennessee 37088-0768, phone (615) 443-6612.
WILSON BANK HOLDING COMPANY FINANCIAL HIGHLIGHTS (UNAUDITED)
In Thousands, Except Per Share Information | |||||||||||||||
As Of December 31, | |||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||
CONSOLIDATED BALANCE SHEETS: | |||||||||||||||
Total assets end of year | $ | 2,198,051 | 2,021,604 | 1,873,242 | 1,748,971 | 1,680,820 | |||||||||
Loans, net | $ | 1,667,088 | 1,443,179 | 1,329,865 | 1,184,267 | 1,142,111 | |||||||||
Securities | $ | 349,209 | 359,323 | 374,543 | 356,196 | 332,786 | |||||||||
Deposits | $ | 1,942,135 | 1,789,850 | 1,660,270 | 1,554,255 | 1,493,922 | |||||||||
Stockholders’ equity | $ | 244,620 | 223,438 | 200,892 | 177,671 | 169,698 | |||||||||
Years Ended December 31, | |||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||
CONSOLIDATED STATEMENTS OF EARNINGS: | |||||||||||||||
Interest income | $ | 84,746 | 78,839 | 74,380 | 71,814 | 72,361 | |||||||||
Interest expense | 8,284 | 8,608 | 9,768 | 10,879 | 14,107 | ||||||||||
Net interest income | 76,462 | 70,231 | 64,612 | 60,935 | 58,254 | ||||||||||
Provision for loan losses | 379 | 388 | 498 | 2,177 | 9,528 | ||||||||||
Net interest income after provision for loan losses | 76,083 | 69,843 | 64,114 | 58,758 | 48,726 | ||||||||||
Non-interest income | 21,728 | 19,941 | 16,678 | 15,204 | 16,035 | ||||||||||
Non-interest expense | 57,337 | 52,159 | 47,705 | 48,787 | 45,098 | ||||||||||
Earnings before income taxes | 40,474 | 37,625 | 33,087 | 25,175 | 19,663 | ||||||||||
Income taxes | 14,841 | 13,762 | 12,310 | 9,306 | 7,515 | ||||||||||
Net earnings | $ | 25,633 | 23,863 | 20,777 | 15,869 | 12,148 | |||||||||
Cash dividends declared | $ | 5,756 | 4,935 | 4,510 | 4,464 | 6,243 | |||||||||
PER SHARE DATA: (1) | |||||||||||||||
Basic earnings per common share | $ | 2.49 | 2.35 | 2.06 | 1.59 | 1.24 | |||||||||
Diluted earnings per common share | $ | 2.49 | 2.35 | 2.06 | 1.59 | 1.24 | |||||||||
Cash dividends | $ | 0.56 | 0.49 | 0.45 | 0.45 | 0.64 | |||||||||
Book value | $ | 23.71 | 21.90 | 19.90 | 17.77 | 17.15 | |||||||||
RATIOS: | |||||||||||||||
Return on average stockholders’ equity | 10.80 | % | 11.17 | % | 10.95 | % | 9.20 | % | 7.49 | % | |||||
Return on average assets | 1.21 | % | 1.23 | % | 1.15 | % | 0.93 | % | 75.00 | % | |||||
Capital to assets | 11.13 | % | 11.05 | % | 10.72 | % | 10.16 | % | 10.10 | % | |||||
Dividends declared per share as percentage of basic earnings per share | 22.49 | % | 20.77 | % | 21.82 | % | 28.30 | % | 51.52 | % | |||||
(1) Per share data has been retroactively adjusted to reflect a 4 for 3 stock split which occurred effective March 30, 2016.
WILSON BANK HOLDING COMPANY
Consolidated Financial Statements
December 31, 2016 and 2015
(With Independent Auditor’s Report Thereon)
 | Stephen M. Maggart, CPA, ABV, CFF J. Mark Allen, CPA Michael T. Holland, CPA, ABV, CFF M. Todd Maggart, CPA, ABV, CFF Michael F. Murphy, CPA P. Jason Ricciardi, CPA, CGMA David B. von Dohlen, CPA T. Keith Wilson, CPA, CITP | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Wilson Bank Holding Company:
We have audited the accompanying consolidated balance sheets of Wilson Bank Holding Company and Subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of earnings, comprehensive earnings, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2016. We also have audited Wilson Bank Holding Company and Subsidiary’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Wilson Bank Holding Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wilson Bank Holding Company and Subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Wilson Bank Holding Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Maggart & Associates, P.C.
Nashville, Tennessee
February 24, 2017
150 FOURTH AVENUE, NORTH ▪ SUITE 2150 ▪ NASHVILLE, TENNESSEE 37219-2431 ▪ (615) 252-6100 ▪ Fax ▪ (615) 252-6105
www.maggartpc.com
WILSON BANK HOLDING COMPANY
Consolidated Balance Sheets
December 31, 2016 and 2015
Dollars in thousands | ||||||
2016 | 2015 | |||||
ASSETS | ||||||
Loans, net of allowance for loan losses of $22,731 and $22,900, respectively | $ | 1,667,088 | 1,443,179 | |||
Securities: | ||||||
Held-to-maturity, at amortized cost (market value $36,145 and $28,365, respectively) | 36,624 | 28,195 | ||||
Available-for-sale, at market (amortized cost $319,201 and $332,506, respectively) | 312,585 | 331,128 | ||||
Total securities | 349,209 | 359,323 | ||||
Loans held for sale | 14,788 | 10,135 | ||||
Federal funds sold | — | 35,220 | ||||
Restricted equity securities, at cost | 3,012 | 3,012 | ||||
Total earning assets | 2,034,097 | 1,850,869 | ||||
Cash and due from banks | 47,918 | 74,033 | ||||
Premises and equipment, net | 44,414 | 42,100 | ||||
Accrued interest receivable | 6,104 | 5,244 | ||||
Deferred income taxes | 10,758 | 8,039 | ||||
Other real estate | 4,527 | 5,410 | ||||
Bank owned life insurance | 28,616 | 17,733 | ||||
Goodwill | 4,805 | 4,805 | ||||
Other assets | 16,812 | 13,371 | ||||
Total assets | $ | 2,198,051 | 2,021,604 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Deposits | $ | 1,942,135 | 1,789,850 | |||
Securities sold under repurchase agreements | 736 | 2,035 | ||||
Accrued interest and other liabilities | 10,560 | 6,281 | ||||
Total liabilities | 1,953,431 | 1,798,166 | ||||
Stockholders’ equity: | ||||||
Common stock, par value $2.00 per share, authorized 50,000,000 and 15,000,000 shares, respectively, 10,319,673 and 7,652,144 shares issued and outstanding, respectively | 20,639 | 15,304 | ||||
Additional paid-in capital | 60,541 | 61,339 | ||||
Retained earnings | 167,523 | 147,646 | ||||
Net unrealized losses on available-for-sale securities, net of taxes of $2,533 and $527, respectively | (4,083 | ) | (851 | ) | ||
Total stockholders’ equity | 244,620 | 223,438 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||
Total liabilities and stockholders’ equity | $ | 2,198,051 | 2,021,604 | |||
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Consolidated Statements of Earnings
Three Years Ended December 31, 2016
Dollars In Thousands (except per share data) | |||||||||
2016 | 2015 | 2014 | |||||||
Interest income: | |||||||||
Interest and fees on loans | $ | 77,024 | 71,543 | 66,685 | |||||
Interest and dividends on securities: | |||||||||
Taxable securities | 5,714 | 5,868 | 6,464 | ||||||
Exempt from Federal income taxes | 1,191 | 768 | 679 | ||||||
Interest on loans held for sale | 391 | 385 | 263 | ||||||
Interest on Federal funds sold | 304 | 154 | 167 | ||||||
Interest and dividends on restricted equity securities | 122 | 121 | 122 | ||||||
Total interest income | 84,746 | 78,839 | 74,380 | ||||||
Interest expense: | |||||||||
Interest on negotiable order of withdrawal accounts | 1,371 | 1,515 | 1,587 | ||||||
Interest on money market accounts and other savings accounts | 1,915 | 1,906 | 2,366 | ||||||
Interest on certificates of deposit and individual retirement accounts | 4,978 | 5,179 | 5,791 | ||||||
Interest on securities sold under repurchase agreements | 3 | 7 | 23 | ||||||
Interest on Federal funds purchased | 17 | 1 | 1 | ||||||
Total interest expense | 8,284 | 8,608 | 9,768 | ||||||
Net interest income before provision for loan losses | 76,462 | 70,231 | 64,612 | ||||||
Provision for loan losses | 379 | 388 | 498 | ||||||
Net interest income after provision for loan losses | 76,083 | 69,843 | 64,114 | ||||||
Non-interest income | 21,728 | 19,941 | 16,678 | ||||||
Non-interest expense | (57,337 | ) | (52,159 | ) | (47,705 | ) | |||
Earnings before income taxes | 40,474 | 37,625 | 33,087 | ||||||
Income taxes | 14,841 | 13,762 | 12,310 | ||||||
Net earnings | $ | 25,633 | 23,863 | 20,777 | |||||
Basic earnings per common share | $ | 2.49 | 2.35 | 2.06 | |||||
Diluted earnings per common share | $ | 2.49 | 2.35 | 2.06 | |||||
Weighted average common shares outstanding: | |||||||||
Basic | 10,279,332 | 10,165,477 | 10,062,783 | ||||||
Diluted | 10,284,328 | 10,170,180 | 10,068,640 | ||||||
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Consolidated Statements of Comprehensive Earnings
Three Years Ended December 31, 2016
Dollars In Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Net earnings | $ | 25,633 | 23,863 | 20,777 | |||||
Other comprehensive earnings (losses), net of tax: | |||||||||
Net unrealized gains (losses) on available-for-sale securities arising during period, net of taxes of $1,830, $35, and $2,454, respectively | (2,948 | ) | (58 | ) | 3,953 | ||||
Reclassification adjustment for net gains included in net earnings, net of taxes of $176, $71, and $209, respectively | (284 | ) | (114 | ) | (336 | ) | |||
Other comprehensive earnings (losses) | (3,232 | ) | (172 | ) | 3,617 | ||||
Comprehensive earnings | $ | 22,401 | 23,691 | 24,394 | |||||
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Consolidated Statements of Changes in Stockholders’ Equity
Three Years Ended December 31, 2016
Dollars In Thousands | |||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Net Unrealized Gain (Loss) On Available-For-Sale Securities | Total | |||||||||||
Balance December 31, 2013 | $ | 14,997 | 54,519 | 112,451 | (4,296 | ) | 177,671 | ||||||||
Cash dividends declared, $.45 per share | — | — | (4,510 | ) | — | (4,510 | ) | ||||||||
Issuance of 69,289 shares of stock pursuant to dividend reinvestment plan | 139 | 3,065 | — | — | 3,204 | ||||||||||
Issuance of 6,144 shares of stock pursuant to exercise of stock options | 12 | 174 | — | — | 186 | ||||||||||
Share based compensation expense | — | 41 | — | — | 41 | ||||||||||
Net change in fair value of available-for-sale securities during the year, net of taxes of $2,245 | — | — | — | 3,617 | 3,617 | ||||||||||
Repurchase of 2,053 common shares | (4 | ) | (90 | ) | — | — | (94 | ) | |||||||
Net earnings for the year | — | — | 20,777 | — | 20,777 | ||||||||||
Balance December 31, 2014 | 15,144 | 57,709 | 128,718 | (679 | ) | 200,892 | |||||||||
Cash dividends declared, $.49 per share | — | — | (4,935 | ) | — | (4,935 | ) | ||||||||
Issuance of 72,543 shares of stock pursuant to dividend reinvestment plan | 145 | 3,366 | — | — | 3,511 | ||||||||||
Issuance of 7,633 shares of stock pursuant to exercise of stock options | 15 | 226 | — | — | 241 | ||||||||||
Share based compensation expense | — | 38 | — | — | 38 | ||||||||||
Net change in fair value of available-for-sale securities during the year, net of taxes of $106 | — | — | — | (172 | ) | (172 | ) | ||||||||
Net earnings for the year | — | — | 23,863 | — | 23,863 | ||||||||||
Balance December 31, 2015 | 15,304 | 61,339 | 147,646 | (851 | ) | 223,438 | |||||||||
Cash dividends declared, $.56 per share | — | — | (5,756 | ) | — | (5,756 | ) | ||||||||
Issuance of 98,318 shares of stock pursuant to dividend reinvestment plan | 197 | 4,119 | — | — | 4,316 | ||||||||||
Issuance of 5,120 shares of stock pursuant to exercise of stock options | 10 | 142 | — | — | 152 | ||||||||||
Issuance of 2,564,091 shares of common stock pursuant to a 4 for 3 stock split | 5,128 | (5,128 | ) | — | — | — | |||||||||
Share based compensation expense | — | 69 | — | — | 69 | ||||||||||
Net change in fair value of available-for-sale securities during the year, net of taxes of $2,006 | — | — | — | (3,232 | ) | (3,232 | ) | ||||||||
Net earnings for the year | — | — | 25,633 | — | 25,633 | ||||||||||
Balance December 31, 2016 | $ | 20,639 | 60,541 | 167,523 | (4,083 | ) | 244,620 | ||||||||
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Consolidated Statements of Cash Flows
Three Years Ended December 31, 2016
Increase (Decrease) in Cash and Cash Equivalents
Dollars In Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Cash flows from operating activities: | |||||||||
Interest received | $ | 86,641 | 81,054 | 75,937 | |||||
Fees and other income received | 16,029 | 15,346 | 13,269 | ||||||
Proceeds from sales of loans | 160,816 | 157,261 | 105,414 | ||||||
Origination of loans held for sale | (161,114 | ) | (153,882 | ) | (105,078 | ) | |||
Interest paid | (8,278 | ) | (8,728 | ) | (9,964 | ) | |||
Cash paid to suppliers and employees | (53,454 | ) | (51,474 | ) | (45,890 | ) | |||
Income taxes paid | (13,837 | ) | (13,937 | ) | (12,277 | ) | |||
Net cash provided by operating activities | 26,803 | 25,640 | 21,411 | ||||||
Cash flows from investing activities: | |||||||||
Purchase of available-for-sale securities | (181,285 | ) | (125,000 | ) | (171,497 | ) | |||
Proceeds from calls, maturities and paydowns of available-for-sale securities | 102,596 | 95,620 | 86,946 | ||||||
Proceeds from sale of available-for-sale securities | 90,007 | 42,845 | 72,215 | ||||||
Purchase of held-to-maturity securities | (11,479 | ) | (4,413 | ) | (3,610 | ) | |||
Proceeds from maturities and paydowns of held-to-maturity securities | 2,742 | 4,079 | 2,049 | ||||||
Loans made to customers, net of repayments | (223,950 | ) | (114,456 | ) | (144,410 | ) | |||
Purchase of bank owned life insurance and annuity contracts | (11,916 | ) | (8,464 | ) | (5,565 | ) | |||
Purchase of bank premises and equipment | (5,147 | ) | (4,612 | ) | (4,145 | ) | |||
Proceeds from sale of other assets | 15 | 12 | 4 | ||||||
Proceeds from sale of other real estate | 581 | 3,000 | 3,945 | ||||||
Net cash used in investing activities | (237,836 | ) | (111,389 | ) | (164,068 | ) | |||
Cash flows from financing activities: | |||||||||
Net increase in non-interest bearing, savings, NOW and money market deposit accounts | 158,775 | 160,760 | 147,458 | ||||||
Net decrease in time deposits | (6,490 | ) | (31,180 | ) | (41,443 | ) | |||
Net decrease in securities sold under agreements to repurchase | (1,299 | ) | (1,402 | ) | (5,641 | ) | |||
Dividends paid | (5,756 | ) | (4,935 | ) | (4,510 | ) | |||
Proceeds from sale of common stock pursuant to dividend reinvestment | 4,316 | 3,511 | 3,204 | ||||||
Proceeds from sale of common stock pursuant to exercise of stock options | 152 | 241 | 186 | ||||||
Repurchase of common shares | — | — | (94 | ) | |||||
Net cash provided by financing activities | 149,698 | 126,995 | 99,160 | ||||||
Net increase (decrease) in cash and cash equivalents | (61,335 | ) | 41,246 | (43,497 | ) | ||||
Cash and cash equivalents at beginning of year | 109,253 | 68,007 | 111,504 | ||||||
Cash and cash equivalents at end of year | $ | 47,918 | 109,253 | 68,007 | |||||
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Consolidated Statements of Cash Flows, Continued
Three Years Ended December 31, 2016
Increase (Decrease) in Cash and Cash Equivalents
Dollars In Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Reconciliation of net earnings to net cash provided by operating activities: | |||||||||
Net earnings | $ | 25,633 | 23,863 | 20,777 | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||
Depreciation, amortization and accretion | 5,515 | 4,578 | 4,162 | ||||||
Provision for loan losses | 379 | 388 | 498 | ||||||
Share based compensation expense | 69 | 38 | 41 | ||||||
Provision for deferred tax expense (benefit) | (164 | ) | 1,238 | 634 | |||||
Gains on sales of other real estate, net | (52 | ) | (362 | ) | (77 | ) | |||
Loss on sales of other assets | 1 | 2 | 6 | ||||||
Loss (gain) on sale of premises and equipment | 73 | 53 | (7 | ) | |||||
Security gains | (460 | ) | (185 | ) | (545 | ) | |||
Increase in loans held for sale | (4,653 | ) | (669 | ) | (2,444 | ) | |||
Increase (decrease) in taxes payable | 1,168 | (1,413 | ) | (601 | ) | ||||
Increase in other assets, bank owned life insurance and annuity contract earnings | (2,408 | ) | (1,161 | ) | (1,297 | ) | |||
Decrease (increase) in accrued interest receivable | (860 | ) | 219 | (400 | ) | ||||
Increase (decrease) in interest payable | 6 | (120 | ) | (196 | ) | ||||
Increase (decrease) in other liabilities | 2,556 | (829 | ) | 860 | |||||
Total adjustments | 1,170 | 1,777 | 634 | ||||||
Net cash provided by operating activities | $ | 26,803 | 25,640 | 21,411 | |||||
Supplemental Schedule of Non-Cash Activities: | |||||||||
Unrealized gain (loss) in value of securities available-for-sale, net of taxes of $2,006 in 2016, $106 in 2015, and $2,245 in 2014 | $ | (3,232 | ) | (172 | ) | 3,617 | |||
Non-cash transfers from loans to other real estate | $ | 696 | 1,930 | 799 | |||||
Non-cash transfers from other real estate to loans | $ | 1,050 | 1,180 | 2,502 | |||||
Non-cash transfers from loans to other assets | $ | 16 | 4 | 17 | |||||
See accompanying notes to consolidated financial statements.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements
December 31, 2016, 2015 and 2014
(1) | Summary of Significant Accounting Policies |
The accounting and reporting policies of Wilson Bank Holding Company (“the Company”) and Wilson Bank & Trust (“Wilson Bank”) are in accordance with accounting principles generally accepted in the United States of America (“U.S.”) and conform to general practices within the banking industry. The following is a brief summary of the significant policies.
(a) | Principles of Consolidation |
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Wilson Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) | Nature of Operations |
Wilson Bank operates under a state bank charter and provides full banking services. As a state-chartered bank that is not a member of the Federal Reserve, Wilson Bank is subject to regulations of the Tennessee Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). The areas served by Wilson Bank include Wilson County, DeKalb County, Rutherford County, Smith County, Trousdale County, Putnam County, Sumner County, and eastern Davidson County, Tennessee and surrounding counties in Middle Tennessee. Services are provided at the main office and twenty-five branch locations.
(c) | Estimates |
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and 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 relate to the determination of the allowance for loan losses, the valuation of deferred tax assets and other real estate, other-than-temporary impairments of securities, and the fair value of financial instruments.
(d) | Significant Group Concentrations of Credit Risk |
Most of the Company’s activities are with customers located within Middle Tennessee. The types of securities in which the Company invests are described in note 3. The types of lending in which the Company engages are described in note 2. The Company does not have any significant concentrations to any one industry or customer other than as disclosed in note 2.
Residential 1-4 family, commercial real estate and construction mortgage loans, represented 22%, 42% and 20% and 24%, 43% and 19% of the loan portfolio at December 31, 2016 and 2015, respectively.
(e) | Loans |
The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout Middle Tennessee. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan losses, and any unamortized deferred fees or costs on originated loans, and premiums or discounts on purchased loans.
Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized on a straight line basis over the respective term of the loan.
As part of our routine credit monitoring process, the Company performs regular credit reviews of the loan portfolio and loans receive risk ratings by the assigned credit officer, which are subject to validation by our independent loan review department. Risk ratings are categorized as pass, special mention, substandard or doubtful. The Company believes that our categories follow those outlined by our primary regulator.
Generally the accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than when they become 180 days past due. Past due status is based on contractual terms
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
(f) | Allowance for Loan Losses |
Management provides for loan losses by establishing an allowance. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s quarterly review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
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.
In addition to the independent loan review process, the aforementioned risk ratings are subject to continual review by loan officers to determine that the appropriate risk ratings are being utilized in our allowance for loan loss process. Each risk rating is also subject to review by our independent loan review department. Currently, our independent loan review department targets reviews of 100% of existing loan relationships with aggregate debt of $1.0 million and greater and new loans with aggregate debt of $500,000 and greater. In addition, our independent loan review targets portfolio segments, loans assigned to a particular lending officer, and loans with four or more renewals.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are individually classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience, historical loan loss factors, loss experience of various loan segments, and other adjustments based on management’s assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, mortgage and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(g) | Debt and Equity Securities |
Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value based on available market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive income on an after-tax basis. Securities classified as “available for sale” are held for indefinite periods of time and may be sold in response to movements in market interest rates, changes in the maturity or mix of Company assets and liabilities or demand for liquidity. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Other-than-temporary Impairment—Impaired securities are assessed quarterly for the presence of other-than-temporary impairment (“OTTI”). A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of the security. To determine whether OTTI has occurred, management considers factors such as (1) length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospectus of the issuer, and (3) Wilson Bank’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. If management deems a security to be OTTI, management reviews the present value of the future cash flows associated with the security. A shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as a credit loss. If a credit loss is identified, the credit loss is recognized as a charge to earnings and a new cost basis for the security is established. If management concludes that no credit loss exists and it is not “more-likely-than-not” that it will be required to sell the security before the recovery of the security’s cost basis, then the security is not deemed OTTI and the shortfall is recorded as a component of equity.
No securities have been classified as trading securities.
(h) | Federal Home Loan Bank Stock |
The Company, as a member of the Federal Home Loan Bank (“FHLB”) Cincinnati system, is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at par value, which approximates its fair value. Management reviews the investment for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of December 31, 2016, the minimum required investment was approximately $2.4 million. Stock redemptions are at the discretion of the FHLB.
(i) | Loans Held for Sale |
Mortgage loans held-for-sale are carried at fair value. The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.
(j) | Premises and Equipment |
Premises and equipment are stated at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the related assets. Gains or losses realized on items retired and otherwise disposed of are credited or charged to operations and cost and related accumulated depreciation are removed from the asset and accumulated depreciation accounts.
Expenditures for major renovations and improvements of premises and equipment are capitalized and those for maintenance and repairs are charged to earnings as incurred.
(k) | Other Real Estate |
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less the estimated cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to their acquisition by the Company, valuations of these assets are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance [i.e. any direct write-downs] are included in net expenses from foreclosed assets.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(l) | Intangible Assets |
The Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 350, Goodwill and Other Intangible Assets requires that management determine the allocation of intangible assets into identifiable groups at the date of acquisition and that appropriate amortization periods be established. Under the provisions of FASB ASC 350, goodwill is not to be amortized; rather, it is to be monitored for impairment and written down to the impairment value at the time impairment occurs. The Company has determined that no impairment loss needs to be recognized related to its goodwill.
(m) | Cash and Cash Equivalents |
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and Federal funds sold. Generally, Federal funds sold are purchased and sold for one day periods. Management makes deposits only with financial institutions it considers to be financially sound.
(n) | Long-Term Assets |
Premises and equipment, intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
(o) | Securities Sold Under Agreements to Repurchase |
Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by Federal deposit insurance.
(p) | Income Taxes |
The Company accounts for Income Taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). The Company follows accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.
The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
(q) | Equity-Based Incentives |
Stock compensation accounting guidance (FASB ASC 718, “Compensation—Stock Compensation”) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, cash settled stock appreciation rights (SARs), and employee share purchase plans.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options and cash settled SARs.
(r) | Advertising Costs |
Advertising costs are expensed as incurred by the Company and totaled $2,310,000, $2,337,000 and $1,884,000 for 2016, 2015 and 2014, respectively.
(s) | Earnings Per Share |
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
(t) | Fair Value of Financial Instruments |
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in note 20 of the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
(u) | Reclassification |
Certain reclassifications have been made to the 2015 and 2014 figures to conform to the presentation for 2016.
(v) | Off-Balance-Sheet Financial Instruments |
In the ordinary course of business, Wilson Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
(w) | Stock Split |
The Company's Board of Directors voted for a 4 for 3 stock split for stockholders of record as of March 24, 2016 payable March 30, 2016. Each stockholder received four (4) shares of common stock for each three (3) shares owned with no allowance for fractual shares. Per share data and stock options included in these financial statements has been restated to give effect to the stock split.
(x) | Recently Adopted Accounting Pronouncements |
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date" deferred the effective date of ASU 2014-09 by one year to January 1, 2018. We are currently evaluating the potential impact of ASU 2014-09 on our financial statements.
ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, 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
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
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 (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.
ASU 2016-02,“Leases (Topic 842)” ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently evaluating the potential impact of ASU 2016-02 on our financial statements.
ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. We elected to adopt the provisions of ASU 2016-09 during the first quarter of 2016 in advance of the required application date of January 1, 2017.
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.
ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.
There were no other recently issued accounting pronouncements that are expected to materially impact the Company.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(2) | Loans and Allowance for Loan Losses |
The classification of loans at December 31, 2016 and 2015 is as follows:
In Thousands | ||||||
2016 | 2015 | |||||
Mortgage loans on real estate: | ||||||
Residential 1-4 family | $ | 376,872 | 349,631 | |||
Multifamily | 79,908 | 49,564 | ||||
Commercial | 704,807 | 625,623 | ||||
Construction | 339,580 | 275,319 | ||||
Farmland | 37,519 | 32,114 | ||||
Second mortgages | 9,166 | 7,551 | ||||
Equity lines of credit | 56,005 | 46,506 | ||||
Total mortgage loans on real estate | 1,603,857 | 1,386,308 | ||||
Commercial loans | 37,677 | 30,537 | ||||
Agriculture loans | 1,562 | 1,552 | ||||
Consumer installment loans: | ||||||
Personal | 41,117 | 40,196 | ||||
Credit cards | 3,157 | 3,271 | ||||
Total consumer installment loans | 44,274 | 43,467 | ||||
Other loans | 9,055 | 9,250 | ||||
1,696,425 | 1,471,114 | |||||
Net deferred loan fees | (6,606 | ) | (5,035 | ) | ||
Total loans | 1,689,819 | 1,466,079 | ||||
Less: Allowance for loan losses | (22,731 | ) | (22,900 | ) | ||
Loans, net | $ | 1,667,088 | 1,443,179 | |||
At December 31, 2016, variable rate and fixed rate loans totaled $1,178,865,000 and $517,560,000, respectively. At December 31, 2015, variable rate and fixed rate loans totaled $970,428,000 and $500,686,000, respectively.
In the normal course of business, Wilson Bank has made loans at prevailing interest rates and terms to directors and executive officers of the Company and to their affiliates. The aggregate amount of these loans was $9,692,000 and $6,576,000 at December 31, 2016 and 2015, respectively. None of these loans were restructured, charged-off or involved more than the normal risk of collectibility or presented other unfavorable features during the three years ended December 31, 2016.
An analysis of the activity with respect to such loans to related parties is as follows:
In Thousands | ||||||
December 31, | ||||||
2016 | 2015 | |||||
Balance, January 1 | $ | 6,576 | 11,744 | |||
New loans and renewals during the year | 16,295 | 12,329 | ||||
Repayments (including loans paid by renewal) during the year | (13,179 | ) | (17,497 | ) | ||
Balance, December 31 | $ | 9,692 | 6,576 | |||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(2) | Loans and Allowance for Loan Losses, Continued |
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 repayment 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. 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
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
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 incorporates 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 loans 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.
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Substantially all of the Company’s impaired loans are collateral dependent.
The following tables, present the Company’s impaired loans at December 31, 2016 and 2015:
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
In Thousands | |||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||
December 31, 2016 | |||||||||||||||
With no related allowance recorded: | |||||||||||||||
Residential 1-4 family | $ | 150 | 148 | — | 150 | 7 | |||||||||
Multifamily | — | — | — | — | — | ||||||||||
Commercial real estate | 4,248 | 4,246 | — | 4,352 | 38 | ||||||||||
Construction | 1,623 | 1,618 | — | 1,778 | 82 | ||||||||||
Farmland | 104 | 103 | — | 79 | 5 | ||||||||||
Second mortgages | — | — | — | — | — | ||||||||||
Equity lines of credit | — | — | — | — | — | ||||||||||
Commercial | — | — | — | — | — | ||||||||||
Agricultural, installment and other | — | — | — | — | — | ||||||||||
$ | 6,125 | 6,115 | — | 6,359 | 132 | ||||||||||
In Thousands | |||||||||||||||
Record Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||
December 31, 2016 | |||||||||||||||
With allowance recorded: | |||||||||||||||
Residential 1-4 family | $ | 540 | 531 | 196 | 540 | 32 | |||||||||
Multifamily | — | — | — | — | — | ||||||||||
Commercial real estate | 443 | 443 | 120 | 111 | 5 | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Farmland | — | — | — | — | — | ||||||||||
Second mortgages | — | — | — | — | — | ||||||||||
Equity lines of credit | — | — | — | — | — | ||||||||||
Commercial | — | — | — | — | — | ||||||||||
Agricultural, installment and other | — | — | — | — | — | ||||||||||
$ | 983 | 974 | 316 | 651 | 37 | ||||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
In Thousands | |||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||
December 31, 2016 | |||||||||||||||
Total: | |||||||||||||||
Residential 1-4 family | $ | 690 | 679 | 196 | 690 | 39 | |||||||||
Multifamily | — | — | — | — | — | ||||||||||
Commercial real estate | 4,691 | 4,689 | 120 | 4,463 | 43 | ||||||||||
Construction | 1,623 | 1,618 | — | 1,778 | 82 | ||||||||||
Farmland | 104 | 103 | — | 79 | 5 | ||||||||||
Second mortgages | — | — | — | — | — | ||||||||||
Equity lines of credit | — | — | — | — | — | ||||||||||
Commercial | — | — | — | — | — | ||||||||||
Agricultural, installment and other | — | — | — | — | — | ||||||||||
$ | 7,108 | 7,089 | 316 | 7,010 | 169 | ||||||||||
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 | ||||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
In Thousands | |||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||
December 31, 2015 | |||||||||||||||
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 | ||||||||||
December 31, 2015 | |||||||||||||||
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 | ||||||||||
The following tables present the Company’s nonaccrual loans, credit quality indicators and past due loans as of December 31, 2016 and 2015.
Loans on Nonaccrual Status
In Thousands | ||||||
2016 | 2015 | |||||
Residential 1-4 family | $ | — | 41 | |||
Multifamily | — | — | ||||
Commercial real estate | 3,255 | 4,293 | ||||
Construction | — | — | ||||
Farmland | 310 | 575 | ||||
Second mortgages | — | — | ||||
Equity lines of credit | — | — | ||||
Commercial | — | — | ||||
Agricultural, installment and other | — | — | ||||
Total | $ | 3,565 | 4,909 | |||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
The amount of interest income that would have been recognized for the years ended December 31, 2016 and 2015 amounted to $202,000 and $291,000, respectively, if the above nonaccrual loans had been current.
Potential problem loans, which include nonperforming loans, amounted to approximately $16.2 million at December 31, 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 Company’s primary federal regulator, for loans classified as special mention, substandard, or doubtful, excluding the impact of nonperforming loans.
The following table 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 Company’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 liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. |
• | Doubtful loans have all the characteristics of substandard loans with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Company considers all doubtful loans to be impaired and places the loans on nonaccrual status. |
Credit Quality Indicators
In Thousands | ||||||||||||||||||||||||||||||
Residential 1-4 Family | Multifamily | Commercial Real Estate | Construction | Farmland | Second Mortgages | Equity Lines of Credit | Commercial | Agricultural, Installment and Other | Total | |||||||||||||||||||||
Credit Risk Profile by Internally Assigned Grade | ||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||
Pass | $ | 367,987 | 79,908 | 699,314 | 339,354 | 36,675 | 8,748 | 55,850 | 37,677 | 54,754 | 1,680,267 | |||||||||||||||||||
Special mention | 5,616 | — | 668 | 121 | 147 | 303 | — | — | 26 | 6,881 | ||||||||||||||||||||
Substandard | 3,269 | — | 4,825 | 105 | 697 | 115 | 155 | — | 111 | 9,277 | ||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Total | $ | 376,872 | 79,908 | 704,807 | 339,580 | 37,519 | 9,166 | 56,005 | 37,677 | 54,891 | 1,696,425 | |||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||||||||
Pass | $ | 340,019 | 49,564 | 612,318 | 274,926 | 30,933 | 7,097 | 46,361 | 30,525 | 54,154 | 1,445,897 | |||||||||||||||||||
Special mention | 6,957 | — | 8,227 | 277 | 200 | 353 | — | 10 | 38 | 16,062 | ||||||||||||||||||||
Substandard | 2,655 | — | 5,078 | 116 | 981 | 101 | 145 | 2 | 77 | 9,155 | ||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Total | $ | 349,631 | 49,564 | 625,623 | 275,319 | 32,114 | 7,551 | 46,506 | 30,537 | 54,269 | 1,471,114 | |||||||||||||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Age Analysis of Past Due Loans
In Thousands | |||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Nonaccrual and Greater Than 90 Days | Total Nonaccrual and Past Due | Current | Total Loans | Recorded Investment Greater Than 90 Days and Accruing | |||||||||||||||
December 31, 2016 | |||||||||||||||||||||
Residential 1-4 family | $ | 3,311 | 1,307 | 1,434 | 6,052 | 370,820 | 376,872 | 1,434 | |||||||||||||
Multifamily | — | — | — | — | 79,908 | 79,908 | — | ||||||||||||||
Commercial real estate | 41 | 175 | 3,335 | 3,551 | 701,256 | 704,807 | 80 | ||||||||||||||
Construction | 1,872 | 53 | 22 | 1,947 | 337,633 | 339,580 | 22 | ||||||||||||||
Farmland | 56 | 1,163 | 410 | 1,629 | 35,890 | 37,519 | 100 | ||||||||||||||
Second mortgages | 177 | — | 11 | 188 | 8,978 | 9,166 | 11 | ||||||||||||||
Equity lines of credit | 40 | 148 | 17 | 205 | 55,800 | 56,005 | 17 | ||||||||||||||
Commercial | 37 | 4 | — | 41 | 37,636 | 37,677 | — | ||||||||||||||
Agricultural, installment and other | 385 | 85 | 143 | 613 | 54,278 | 54,891 | 143 | ||||||||||||||
Total | $ | 5,919 | 2,935 | 5,372 | 14,226 | 1,682,199 | 1,696,425 | 1,807 | |||||||||||||
December 31, 2015 | |||||||||||||||||||||
Residential 1-4 family | $ | 3,272 | 1,198 | 1,412 | 5,882 | 343,749 | 349,631 | 1,371 | |||||||||||||
Multifamily | — | — | — | — | 49,564 | 49,564 | — | ||||||||||||||
Commercial real estate | 172 | — | 4,293 | 4,465 | 621,158 | 625,623 | — | ||||||||||||||
Construction | 958 | 230 | — | 1,188 | 274,131 | 275,319 | — | ||||||||||||||
Farmland | 88 | 21 | 886 | 995 | 31,119 | 32,114 | 311 | ||||||||||||||
Second mortgages | 87 | — | 4 | 91 | 7,460 | 7,551 | 4 | ||||||||||||||
Equity lines of credit | 283 | 89 | 197 | 569 | 45,937 | 46,506 | 197 | ||||||||||||||
Commercial | 2 | — | 39 | 41 | 30,496 | 30,537 | 39 | ||||||||||||||
Agricultural, installment and other | 382 | 114 | 56 | 552 | 53,717 | 54,269 | 56 | ||||||||||||||
Total | $ | 5,244 | 1,652 | 6,887 | 13,783 | 1,457,331 | 1,471,114 | 1,978 | |||||||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Transactions in the allowance for loan losses for the years ended December 31, 2016 and 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 | |||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||
Beginning balance | $ | 5,024 | 619 | 9,986 | 5,136 | 654 | 106 | 594 | 301 | 480 | 22,900 | |||||||||||||||||||
Provision | (400 | ) | 220 | (399 | ) | 283 | 2 | 2 | 66 | 81 | 524 | 379 | ||||||||||||||||||
Charge-offs | (109 | ) | — | (100 | ) | (66 | ) | — | — | — | (11 | ) | (674 | ) | (960 | ) | ||||||||||||||
Recoveries | 56 | — | 54 | 34 | 2 | 4 | 15 | 15 | 232 | 412 | ||||||||||||||||||||
Ending balance | $ | 4,571 | 839 | 9,541 | 5,387 | 658 | 112 | 675 | 386 | 562 | 22,731 | |||||||||||||||||||
Ending balance individually evaluated for impairment | $ | 196 | — | 120 | — | — | — | — | — | — | 316 | |||||||||||||||||||
Ending balance collectively evaluated for impairment | $ | 4,375 | 839 | 9,421 | 5,387 | 658 | 112 | 675 | 386 | 562 | 22,415 | |||||||||||||||||||
Ending balance loans acquired with deteriorated credit quality | $ | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||
Ending balance | $ | 376,872 | 79,908 | 704,807 | 339,580 | 37,519 | 9,166 | 56,005 | 37,677 | 54,891 | 1,696,425 | |||||||||||||||||||
Ending balance individually evaluated for impairment | $ | 679 | — | 4,689 | 1,618 | 103 | — | — | — | — | 7,089 | |||||||||||||||||||
Ending balance collectively evaluated for impairment | $ | 376,193 | 79,908 | 700,118 | 337,962 | 37,416 | 9,166 | 56,005 | 37,677 | 54,891 | 1,689,336 | |||||||||||||||||||
Ending balance loans acquired with deteriorated credit quality | $ | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
In thousands | ||||||||||||||||||||||||||||||
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 | $ | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
The Company’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. The concessions typically result from the Company’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.
The following table summarizes the carrying balances of TDRs at December 31, 2016 and December 31, 2015 (dollars in thousands):
2016 | 2015 | |||||
Performing TDRs | $ | 3,277 | 983 | |||
Nonperforming TDRs | 1,319 | 3,121 | ||||
Total TDRs | $ | 4,596 | 4,104 | |||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the years ended December 31, 2016 and 2015 (dollars in thousands):
December 31, 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 | 4 | 130 | 130 | 2 | 77 | 77 | |||||||||||
Multifamily | — | — | — | — | — | — | |||||||||||
Commercial real estate | 2 | 1,364 | 1,244 | — | — | — | |||||||||||
Construction | — | — | — | 1 | 1,938 | 1,938 | |||||||||||
Farmland | 1 | 103 | 103 | — | — | — | |||||||||||
Second mortgages | — | — | — | — | — | — | |||||||||||
Equity lines of credit | — | — | — | — | — | — | |||||||||||
Commercial | — | — | — | — | — | — | |||||||||||
Agricultural, installment and other | 2 | 17 | 17 | 1 | 2 | 1 | |||||||||||
Total | 9 | 1,614 | 1,494 | 4 | 2,017 | 2,016 | |||||||||||
As of December 31, 2016 the Company did not have any loans previously classified as troubled debt restructurings default within twelve months of the restructuring. As of December 31, 2015 the Company had two loans totaling $1,060,000 previously classified as troubled debt restructurings default within twelve months of the restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract.
The Company’s principal customers are primarily in the Middle Tennessee area with a concentration in Wilson County, Tennessee. Credit is extended to businesses and individuals and is evidenced by promissory notes. The terms and conditions of the loans including collateral vary depending upon the purpose of the credit and the borrower’s financial condition.
In 2016, 2015 and 2014, the Company originated loans in the secondary market of $161,114,000, $153,882,000 and $105,078,000, respectively. The fees and gain on sale of these loans totaled $4,355,000, $4,048,000 and $2,780,000 in 2016, 2015 and 2014, respectively. The Company sells loans to third-party investors on a loan-by-loan basis and has not entered into any forward commitments with investors for future bulk sales. All of these loan sales transfer servicing rights to the buyer.
In some instances Wilson Bank sells loans that contain provisions which permit the borrower to seek recourse against Wilson Bank in certain circumstances. At December 31, 2016 and 2015, total loans sold with recourse in the secondary market aggregated $124,480,000 and $111,521,000, respectively. At December 31, 2016, Wilson Bank has not been required to repurchase a significant amount of the loans originated by Wilson Bank and sold in the secondary market. Management expects no material losses to result from these recourse provisions.
(3) | Debt and Equity Securities |
Debt and equity securities have been classified in the consolidated balance sheet according to management’s intent. Debt and equity securities at December 31, 2016 consist of the following:
Securities Held-To-Maturity | ||||||||||||
In Thousands | ||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
Mortgage-backed: | ||||||||||||
Government-sponsored enterprises (GSEs)* residential | $ | 11,856 | 48 | 230 | 11,674 | |||||||
Obligations of states and political subdivisions | 24,768 | 142 | 439 | 24,471 | ||||||||
$ | 36,624 | 190 | 669 | 36,145 | ||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Securities Available-For-Sale | ||||||||||||
In Thousands | ||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
Government-sponsored enterprises (GSEs)* | $ | 61,879 | — | 2,391 | 59,488 | |||||||
Mortgage-backed: | ||||||||||||
GSE residential | 166,316 | 496 | 2,447 | 164,365 | ||||||||
Asset-backed: | ||||||||||||
SBAP | 37,577 | 9 | 729 | 36,857 | ||||||||
Obligations of states and political subdivisions | 53,429 | 52 | 1,606 | 51,875 | ||||||||
$ | 319,201 | 557 | 7,173 | 312,585 | ||||||||
* | Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, Federal Farm Credit Banks and Government National Mortgage Association. |
The Company’s classification of securities at December 31, 2015 is as follows:
Securities Held-To-Maturity | ||||||||||||
In Thousands | ||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
Mortgage-backed: | ||||||||||||
Government-sponsored enterprises (GSEs)* residential | $ | 9,375 | 60 | 169 | 9,266 | |||||||
Obligations of states and political subdivisions | 18,820 | 288 | 9 | 19,099 | ||||||||
$ | 28,195 | 348 | 178 | 28,365 | ||||||||
Securities Available-For-Sale | ||||||||||||
In Thousands | ||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
Government-sponsored enterprises (GSEs)* | $ | 77,177 | 215 | 483 | 76,909 | |||||||
Mortgage-backed: | ||||||||||||
GSE residential | 192,983 | 430 | 1,498 | 191,915 | ||||||||
Asset-backed: | ||||||||||||
SBAP | 31,253 | 54 | 273 | 31,034 | ||||||||
Obligations of states and political subdivisions | 31,093 | 274 | 97 | 31,270 | ||||||||
$ | 332,506 | 973 | 2,351 | 331,128 | ||||||||
* | Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, Federal Farm Credit Banks and Government National Mortgage Association. |
Included in mortgage-backed GSE residential available-for-sale securities are collateralized mortgage obligations totaling $16,015,000 (fair value of $15,814,000) and $14,269,000 (fair value of $14,168,000) at December 31, 2016 and 2015, respectively.
The amortized cost and estimated market value of debt securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
In Thousands | ||||||
Securities Held-To-Maturity | Amortized Cost | Estimated Market Value | ||||
Due in one year or less | $ | 2,003 | 2,013 | |||
Due after one year through five years | 10,122 | 10,151 | ||||
Due after five years through ten years | 8,307 | 8,124 | ||||
Due after ten years | 4,336 | 4,183 | ||||
24,768 | 24,471 | |||||
Mortgage-backed securities | 11,856 | 11,674 | ||||
$ | 36,624 | 36,145 | ||||
In Thousands | ||||||
Securities Available-For-Sale | Amortized Cost | Estimated Market Value | ||||
Due in one year or less | $ | — | — | |||
Due after one year through five years | 16,932 | 16,749 | ||||
Due after five years through ten years | 72,882 | 70,589 | ||||
Due after ten years | 25,494 | 24,025 | ||||
115,308 | 111,363 | |||||
Mortgage and asset-backed securities | 203,893 | 201,222 | ||||
$ | 319,201 | 312,585 | ||||
Results from sales of debt and equity securities are as follows:
In Thousands | ||||||||||
2016 | 2015 | 2014 | ||||||||
Gross proceeds | $ | 90,007 | 42,845 | 72,215 | ||||||
Gross realized gains | $ | 716 | 261 | $ | 638 | |||||
Gross realized losses | (256 | ) | (76 | ) | (93 | ) | ||||
Net realized gains | $ | 460 | 185 | $ | 545 | |||||
Securities carried in the balance sheet of approximately $196,397,000 (approximate market value of $192,484,000) and $163,674,000 (approximate market value of $162,905,000) were pledged to secure public deposits and for other purposes as required or permitted by law at December 31, 2016 and 2015, respectively.
Included in the securities above are $27,412,000 and $10,840,000 (approximate market value of $27,088,000 and $10,269,000) and $21,593,000 and $1,073,000 (approximate market value of $21,896,000 and $1,083,000) at December 31, 2016 and 2015, respectively, in obligations of political subdivisions located within the State of Tennessee and Texas, respectively. Management purchases only obligations of such political subdivisions it considers to be financially sound.
Securities that have rates that adjust prior to maturity totaled $50,991,000 (approximate market value of $51,132,000) and $40,023,000 (approximate market value of $40,009,000) at December 31, 2016 and 2015, respectively.
Temporarily Impaired Securities
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Available-for-sale and held to maturity securities that have been in a continuous unrealized loss position at December 31, 2016 are as follows:
In Thousands, Except Number of Securities | |||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Number of Securities Included | Fair Value | Unrealized Losses | Number of Securities Included | Fair Value | Unrealized Losses | ||||||||||||||||||||||
Held to Maturity Securities: | |||||||||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||||||||
Mortgage-backed: | |||||||||||||||||||||||||||||
GSE residential | $ | 8,177 | $ | 151 | 7 | $ | 1,704 | $ | 79 | 1 | $ | 9,881 | $ | 230 | |||||||||||||||
Obligations of states and political subdivisions | 16,081 | 439 | 41 | — | — | — | 16,081 | 439 | |||||||||||||||||||||
$ | 24,258 | $ | 590 | 48 | $ | 1,704 | $ | 79 | 1 | $ | 25,962 | $ | 669 | ||||||||||||||||
Available-for-Sale Securities: | |||||||||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||||||||
GSEs | $ | 59,488 | $ | 2,391 | 23 | $ | — | $ | — | — | $ | 59,488 | $ | 2,391 | |||||||||||||||
Mortgage-backed: | |||||||||||||||||||||||||||||
GSE residential | 124,011 | 2,350 | 64 | 6,918 | 97 | 9 | 130,929 | 2,447 | |||||||||||||||||||||
Asset-backed: | |||||||||||||||||||||||||||||
SBAP | 33,579 | 729 | 17 | — | — | — | 33,579 | 729 | |||||||||||||||||||||
Obligations of states and political subdivisions | 42,801 | 1,606 | 116 | — | — | — | 42,801 | 1,606 | |||||||||||||||||||||
$ | 259,879 | $ | 7,076 | 220 | $ | 6,918 | $ | 97 | 9 | $ | 266,797 | $ | 7,173 | ||||||||||||||||
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.
Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we will receive full value for the securities. Furthermore, as of December 31, 2016, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2016, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated statements of earnings.
(4) | Restricted Equity Securities |
Restricted equity securities consists of stock of the FHLB of Cincinnati amounting to $3,012,000 at December 31, 2016 and 2015. The stock can be sold back only at par or a value as determined by the issuing institution and only to the respective financial institution or to another member institution. These securities are recorded at cost.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(5) | Premises and Equipment |
The detail of premises and equipment at December 31, 2016 and 2015 is as follows:
In Thousands | ||||||
2016 | 2015 | |||||
Land | $ | 17,022 | 17,022 | |||
Buildings | 29,937 | 27,821 | ||||
Leasehold improvements | 368 | 140 | ||||
Furniture and equipment | 9,760 | 8,605 | ||||
Automobiles | 304 | 280 | ||||
Construction-in-progress | 2,851 | 2,091 | ||||
60,242 | 55,959 | |||||
Less accumulated depreciation | (15,828 | ) | (13,859 | ) | ||
$ | 44,414 | 42,100 | ||||
During 2016, 2015 and 2014 payments of $1,361,000, $1,222,000 and $1,176,000, respectively, were made to an entity owned by a director for the construction of buildings and minor repair work.
Depreciation expense was $2,760,000, $2,582,000 and $2,205,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
(6) | Acquired Intangible Assets and Goodwill |
The Company's intangible assets result from the excess of purchase price over the applicable book value of the net assets acquired related to outside ownership of two previously 50% owned subsidiaries that the Company acquired 100% of in 2005.
In Thousands | ||||||
2016 | 2015 | |||||
Goodwill: | ||||||
Balance at January 1, | $ | 4,805 | 4,805 | |||
Goodwill acquired during year | — | — | ||||
Impairment loss | — | — | ||||
Balance at December 31, | $ | 4,805 | 4,805 | |||
(7) | Deposits |
Deposits at December 31, 2016 and 2015 are summarized as follows:
In Thousands | ||||||
2016 | 2015 | |||||
Demand deposits | $ | 226,971 | 197,062 | |||
Savings accounts | 123,749 | 107,829 | ||||
Negotiable order of withdrawal accounts | 454,487 | 445,967 | ||||
Money market demand accounts | 628,321 | 523,895 | ||||
Certificates of deposit $250,000 or greater | 64,938 | 64,236 | ||||
Other certificates of deposit | 360,871 | 364,274 | ||||
Individual retirement accounts $250,000 or greater | 8,417 | 9,074 | ||||
Other individual retirement accounts | 74,381 | 77,513 | ||||
$ | 1,942,135 | 1,789,850 | ||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Principal maturities of certificates of deposit and individual retirement accounts at December 31, 2016 are as follows:
(In Thousands) | |||
Maturity | Total | ||
2017 | $ | 246,092 | |
2018 | 131,358 | ||
2019 | 76,942 | ||
2020 | 34,783 | ||
2021 | 19,432 | ||
Thereafter | — | ||
$ | 508,607 | ||
The aggregate amount of overdrafts reclassified as loans receivable was $481,000 and $303,000 at December 31, 2016 and 2015, respectively.
As of December 31, 2016 and 2015, Wilson Bank was not required to maintain a cash balance with the Federal Reserve.
(8) | Securities Sold Under Repurchase Agreements |
Securities sold under repurchase agreements were $736,000 and $2,035,000 at December 31, 2016 and 2015, respectively. The maximum amounts of outstanding repurchase agreements at any month end during 2016 and 2015 were $2,070,000 and $3,514,000, respectively. The average daily balance outstanding during 2016 and 2015 was $1,214,000 and $2,505,000, respectively. The weighted-average interest rate on the outstanding balance at December 31, 2016 and 2015 was .25% . The underlying securities are typically held by other financial institutions and are designated as pledged.
(9) | Non-Interest Income and Non-Interest Expense |
The significant components of non-interest income and non-interest expense for the years ended December 31, 2016, 2015 and 2014 are presented below:
In Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Non-interest income: | |||||||||
Service charges on deposits | $ | 5,769 | 5,148 | 4,374 | |||||
Other fees and commissions | 10,260 | 9,321 | 8,519 | ||||||
BOLI and annuity earnings | 832 | 877 | 376 | ||||||
Security gains, net | 460 | 185 | 545 | ||||||
Fees and gains on sales of loans | 4,355 | 4,048 | 2,780 | ||||||
Gain on sale of other real estate, net | 52 | 362 | 77 | ||||||
Gain on sale of fixed assets, net | — | — | 7 | ||||||
$ | 21,728 | 19,941 | 16,678 | ||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
In Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Non-interest expense: | |||||||||
Employee salaries and benefits | $ | 34,106 | 31,556 | 27,793 | |||||
Occupancy expenses | 3,638 | 3,444 | 3,100 | ||||||
Furniture and equipment expenses | 2,019 | 2,063 | 1,767 | ||||||
Loss on the sale of fixed assets, net | 73 | 53 | — | ||||||
Loss on sales of other assets, net | 1 | 2 | 6 | ||||||
Data processing expenses | 2,576 | 2,476 | 2,313 | ||||||
FDIC insurance | 968 | 953 | 1,049 | ||||||
Directors’ fees | 691 | 735 | 720 | ||||||
Other operating expenses | 13,265 | 10,877 | 10,957 | ||||||
$ | 57,337 | 52,159 | 47,705 | ||||||
(10) | Income Taxes |
The components of the net deferred tax asset are as follows:
In Thousands | ||||||
2016 | 2015 | |||||
Deferred tax asset: | ||||||
Federal | $ | 11,316 | 8,954 | |||
State | 1,863 | 1,380 | ||||
13,179 | 10,334 | |||||
Deferred tax liability: | ||||||
Federal | (2,010 | ) | (1,905 | ) | ||
State | (411 | ) | (390 | ) | ||
(2,421 | ) | (2,295 | ) | |||
Net deferred tax asset | $ | 10,758 | 8,039 | |||
The tax effects of each type of significant item that gave rise to deferred tax assets (liabilities) are:
In Thousands | ||||||
2016 | 2015 | |||||
Financial statement allowance for loan losses in excess of tax allowance | $ | 8,252 | 8,317 | |||
Excess of depreciation deducted for tax purposes over the amounts deducted in the financial statements | (1,941 | ) | (1,815 | ) | ||
Financial statement deduction for deferred compensation in excess of deduction for tax purposes | 1,423 | 1,174 | ||||
Writedown of other real estate not deductible for income tax purposes until sold | 287 | 162 | ||||
Financial statement income on FHLB stock dividends not recognized for tax purposes | (480 | ) | (480 | ) | ||
Unrealized loss on securities available-for-sale | 2,533 | 528 | ||||
Other items, net | 684 | 153 | ||||
$ | 10,758 | 8,039 | ||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
The components of income tax expense (benefit) are summarized as follows:
In Thousands | |||||||||
Federal | State | Total | |||||||
2016 | |||||||||
Current | $ | 12,910 | 2,095 | 15,005 | |||||
Deferred | (136 | ) | (28 | ) | (164 | ) | |||
Total | $ | 12,774 | 2,067 | 14,841 | |||||
2015 | |||||||||
Current | $ | 10,871 | 1,653 | 12,524 | |||||
Deferred | 1,028 | 210 | 1,238 | ||||||
Total | $ | 11,899 | 1,863 | 13,762 | |||||
2014 | |||||||||
Current | $ | 10,201 | 1,475 | 11,676 | |||||
Deferred | 526 | 108 | 634 | ||||||
Total | $ | 10,727 | 1,583 | 12,310 | |||||
A reconciliation of actual income tax expense of $14,841,000, $13,762,000 and $12,310,000 for the years ended December 31, 2016, 2015 and 2014, respectively, to the “expected” tax expense (computed by applying the statutory rate of 34% to earnings before income taxes) is as follows:
In Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Computed “expected” tax expense | $ | 13,761 | 12,793 | 11,250 | |||||
State income taxes, net of Federal income tax benefit | 1,364 | 1,243 | 1,029 | ||||||
Tax exempt interest, net of interest expense exclusion | (401 | ) | (266 | ) | (244 | ) | |||
Federal income tax rate in excess of statutory rate related to taxable income over $10 million | 370 | 312 | 290 | ||||||
Earnings on cash surrender value of life insurance | (283 | ) | (298 | ) | (128 | ) | |||
Expenses not deductible for tax purposes | 40 | 35 | 37 | ||||||
Stock based compensation expense | 35 | 13 | 14 | ||||||
Other | (45 | ) | (70 | ) | 62 | ||||
$ | 14,841 | 13,762 | 12,310 | ||||||
Total income tax expense for 2016, 2015 and 2014, includes $176,000, $71,000 and $209,000 of expense related to the realized gain and loss, respectively, on sale of securities.
As of December 31, 2016, 2015 and 2014 the Company has not accrued or recognized interest or penalties related to uncertain tax positions. It is the Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.
There were no unrecognized tax benefits at December 31, 2016.
Wilson Bank does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months. Included in the balance at December 31, 2016, were approximately $13.2 million of tax positions (deferred tax assets) for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company and Wilson Bank file income tax returns in the United States (“U.S.”), as well as in the State of Tennessee. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2012. The Company’s Federal tax returns have been audited through December 31, 2004 with no changes.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(11) | Commitments and Contingent Liabilities |
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the Company's consolidated financial position.
Wilson Bank leases land for certain branch facilities and automatic teller machine locations. Future minimum rental payments required under the terms of the noncancellable leases are as follows:
Years Ending December 31, | In Thousands | ||
2017 | $ | 244 | |
2018 | 218 | ||
2019 | 222 | ||
2020 | 228 | ||
2021 | 163 | ||
Total rent expense amounted to $204,000, $192,000 and $133,000, respectively, during the years ended December 31, 2016, 2015 and 2014.
The Company has lines of credit with other financial institutions totaling $53,000,000 at December 31, 2016 and 2015. At December 31, 2016 and 2015, respectively, there was no balance outstanding under these lines of credit.
The Company also has a Cash Management Advance ("CMA") Line of Credit agreement. The CMA is a component of the Company's Blanket Agreement for advances with the FHLB. The purpose of the CMA is to assist with short-term liquidity management. Under the terms of the CMA, the Company may borrow a maximum of $25,000,000, selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. There were no borrowings outstanding under the CMA at December 31, 2016 or December 31, 2015.
(12) | Financial Instruments with Off-Balance-Sheet Risk |
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
In Thousands | ||||||
Contract or Notional Amount | ||||||
2016 | 2015 | |||||
Financial instruments whose contract amounts represent credit risk: | ||||||
Unused commitments to extend credit | $ | 483,818 | 391,553 | |||
Standby letters of credit | 50,660 | 36,631 | ||||
Total | $ | 534,478 | 428,184 | |||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral normally consists of real property.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments and the present creditworthiness of such counterparties. Such commitments have been made on terms which are competitive in the markets in which the Company operates; thus, the fair value of standby letters of credit equals the carrying value for the purposes of this disclosure. The maximum potential amount of future payments that the Company could be required to make under the guarantees totaled $50.7 million at December 31, 2016.
(13) | Concentration of Credit Risk |
Practically all of the Company’s loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company’s market area. Practically all such customers are depositors of Wilson Bank. The concentrations of credit by type of loan are set forth in note 2 to the consolidated financial statements.
At December 31, 2016, the Company’s cash and due from banks and federal funds sold included commercial bank deposits aggregating $704,000 in excess of the FDIC limit of $250,000 per depositor.
Federal funds sold were deposited with one bank.
(14) | Employee Benefit Plan |
Wilson Bank has in effect a 401(k) plan (the “401(k) Plan”) which covers eligible employees. To be eligible an employee must have obtained the age of 20.5. The provisions of the 401(k) Plan provide for both employee and employer contributions. For the years ended December 31, 2016, 2015 and 2014, Wilson Bank contributed $2,006,000, $1,840,000 and $1,734,000, respectively, to the 401(k) Plan.
(15) | Dividend Reinvestment Plan |
Under the terms of the Company’s dividend reinvestment plan (the “DRIP”) holders of common stock may elect to automatically reinvest cash dividends in additional shares of common stock. The Company may elect to sell original issue shares or to purchase shares in the open market for the account of participants. Original issue shares of 98,318 in 2016, 72,543 in 2015 and 69,289 in 2014 were sold to participants under the terms of the DRIP.
(16) | Regulatory Matters and Restrictions on Dividends |
The Company and Wilson Bank are subject to regulatory capital requirements administered by the FDIC, the Federal Reserve and the Tennessee Department of Financial Institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Wilson Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Wilson Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Wilson Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2016 and 2015, that the Company and Wilson Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2016, the most recent notification from the FDIC categorized Wilson Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed Wilson Bank’s category. To be categorized as well capitalized for purposes of prompt corrective action regulations as of December 31, 2016 and 2015, an institution must have maintained minimum capital ratios as set forth in the following tables and not have been subject to a written agreement, order or directive to maintain a higher capital level. The Company’s and Wilson Bank’s actual capital amounts and ratios as of December 31, 2016 and 2015, are also presented in the table:
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Actual | Regulatory Minimum Capital Requirement | Regulatory Minimum To Be Well Capitalized | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | $ | 266,954 | 12.7 | % | $ | 181,298 | 8.625 | % | N/A | N/A | ||||||||||
Wilson Bank | 265,142 | 12.6 | 181,496 | 8.625 | $ | 210,430 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 243,897 | 11.6 | 139,295 | 6.625 | N/A | N/A | ||||||||||||||
Wilson Bank | 242,085 | 11.5 | 139,462 | 6.625 | 168,407 | 8.0 | ||||||||||||||
Common equity Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 243,897 | 11.6 | 107,756 | 5.125 | N/A | N/A | ||||||||||||||
Wilson Bank | 242,085 | 11.5 | 107,886 | 5.125 | 136,831 | 6.5 | ||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||
Consolidated | 243,897 | 11.2 | 87,106 | 4.0 | N/A | N/A | ||||||||||||||
Wilson Bank | 242,085 | 11.1 | 87,238 | 4.0 | 109,047 | 5.0 | ||||||||||||||
Actual | Regulatory Minimum Capital Requirement | Regulatory Minimum To Be Well Capitalized | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
December 31, 2015 | ||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | $ | 240,848 | 14.1 | % | $ | 136,588 | 8.0 | % | N/A | N/A | ||||||||||
Wilson Bank | 238,963 | 14.0 | 136,575 | 8.0 | $ | 170,719 | 10.0 | % | ||||||||||||
Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 219,483 | 12.9 | 102,441 | 6.0 | N/A | N/A | ||||||||||||||
Wilson Bank | 217,600 | 12.8 | 102,431 | 6.0 | 136,575 | 8.0 | ||||||||||||||
Common Equity Tier 1 capital to risk weighted assets: | ||||||||||||||||||||
Consolidated | 219,483 | 12.9 | 76,831 | 4.5 | N/A | N/A | ||||||||||||||
Wilson Bank | 217,600 | 12.8 | 76,823 | 4.5 | 110,967 | 6.5 | ||||||||||||||
Tier 1 capital to average assets: | ||||||||||||||||||||
Consolidated | 219,483 | 11.1 | 79,361 | 4.0 | N/A | N/A | ||||||||||||||
Wilson Bank | 217,600 | 11.0 | 79,354 | 4.0 | 99,192 | 5.0 | ||||||||||||||
In July 2013, the Federal banking regulators, in response to the Statutory Requirements of The Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted new regulations implementing the Basel Capital Adequacy Accord (“Basel III”) and the related minimum capital ratios. The new capital requirements were effective beginning January 1, 2015 and include a new “Common Equity Tier I Ratio”, which has stricter rules as to what qualifies as Common Equity Tier I Capital. A summary of the changes to the Regulatory Capital Ratios are as follows:
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Guideline in Effect At 12/31/2014 | Basel III Requirements | ||||||||||
Minimum | Well Capitalized | Minimum | Well Capitalized | ||||||||
Common Equity Tier I Ratio (Common Equity to Risk Weighted Assets) | Not Applicable | Not Applicable | 4.5 | % | 6.5 | % | |||||
Tier I Capital to Risk Weighted Assets | 4 | % | 6 | % | 6 | % | 8 | % | |||
Total Capital to Risk Weighted Assets | 8 | % | 10 | % | 8 | % | 10 | % | |||
Tier I Leverage Ratio | 4 | % | 5 | % | 4 | % | 5 | % | |||
The guidelines under Basel III establish a 2.5% capital conservation buffer requirement that is phased in over four years beginning January 1, 2016. The buffer is related to Risk Weighted Assets. In order to avoid limitations on capital distributions such as dividends and certain discretionary bonus payments to executive officers, a banking organization must maintain capital ratios above the minimum ratios including the buffer. The Basel III minimum requirements after giving effect to the buffer as of January 1, of each year are as follows:
2016 | 2017 | 2018 | 2019 | ||||||||
Common Equity Tier I Ratio | 5.125 | % | 5.75 | % | 6.375 | % | 7.0 | % | |||
Tier I Capital to Risk Weighted Assets Ratio | 6.625 | % | 7.25 | % | 7.875 | % | 8.5 | % | |||
Total Capital to Risk Weighted Assets Ratio | 8.625 | % | 9.25 | % | 9.875 | % | 10.5 | % | |||
The requirements of Basel III also place additional restrictions on the inclusion of deferred tax assets and capitalized mortgage servicing rights as a percentage of Tier I Capital. In addition, the risk weights assigned to certain assets such as past due loans and certain real estate loans have been increased.
The requirements of Basel III allow banks and bank holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and Wilson Bank have chosen to opt out of this requirement.
(17) | Salary Deferral Plans |
The Company provides its executive officers certain non-qualified pension benefits through an Executive Salary Continuation Plan ("the Plan") and Supplemental Executive Retirement Plan (SERP) Agreements ("SERP Agreements"). The Plan and SERP agreements were established by the Board of Directors to reward executive management for past performance and to provide additional incentive to retain the service of executive management. The Plan and SERP Agreements generally provide executives with benefits of a portion of their salary beginning at retirement through life. As a result, the Company has accrued a liability for future obligations under the Plan and SERP Agreements. At December 31, 2016 and 2015, the liability related to the Plan totaled $1,869,000 and $1,872,000, respectively. At December 31, 2016 and 2015 the liability related to the SERP Agreements totaled $1,846,000 and $1,161,000, respectively.
The Company has purchased life insurance policies to provide the benefits related to the Plan, which at December 31, 2016 and 2015 had a cash surrender value of $3,688,000 and $3,376,000, respectively, and a face value of insurance policies in force of $11,148,000 and $10,508,000, respectively. The life insurance policies remain the sole property of the Company and are payable to the Company.
The Company has also purchased Flexible Premium Indexed Deferred Annuity Contracts (“Annuity Contracts”) to provide benefits related to the SERP Agreements. The Annuity Contracts remain the sole property of the Company and are payable to the Company. At December 31, 2016 and 2015 the Annuity Contracts had a value of $10,804,000 and $8,939,000, respectively.
The Company has also purchased bank owned life insurance policies on its executive officers. The insurance policies remain the sole property of the Company and are payable to the Company. The cash surrender value of the life insurance contracts totaled $24,928,000 and $14,357,000 and the face amount of the insurance policies in force approximated $61,287,000 and $35,471,000 at December 31, 2016 and 2015, respectively.
(18) | Stock Option Plan |
In April 1999, the stockholders of the Company approved the Wilson Bank Holding Company 1999 Stock Option Plan (the “1999 Stock Option Plan”). The Stock Option Plan provides for the granting of stock options, and authorizes the issuance of common stock upon the exercise of such options, for up to 200,000 shares of common stock, to officers and other key
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
employees of the Company and its subsidiary. Furthermore, the Company and its subsidiary may reserve additional shares for issuance under the 1999 Stock Option Plan as needed in order that the aggregate number of shares that may be issued during the term of the 1999 Stock Option Plan is equal to five percent (5%) of the shares of common stock then issued and outstanding.
In April 2009, the Company’s shareholders approved the Wilson Bank Holding Company 2009 Stock Option Plan (the “2009 Stock Option Plan”). The 2009 Stock Option Plan was effective as of April 14, 2009 and replaces the 1999 Stock Option Plan which expired on April 13, 2009. Under the 2009 Stock Option Plan, awards may be in the form of options to acquire common stock of the Company. Subject to adjustment as provided by the terms of the 2009 Stock Option Plan, the maximum number of shares of common stock with respect to which awards may be granted under the 2009 Stock Option Plan is 100,000 shares. As of December 31, 2016, the Company has granted 49,400 options to employees pursuant to the 2009 Stock Option Plan.
Under the 2009 Stock Option Plan, stock option awards may be granted in the form of incentive stock options or nonstatutory stock options and are generally exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.
During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizes awards of up to 750,000 shares of common stock. The 2016 Equity Incentive Plan was approved by the Board of Directors and effective as of January 25, 2016 and approved by the Company’s shareholders on April 12, 2016. The Board of Directors approved an amendment and restatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”) to make clear that directors who are not also employees of the Company may be awarded stock appreciation rights. The primary purpose of the 2016 Equity Incentive Plan is to promote the interest of the Company and its shareholders by, among other things, (i) attracting and retaining key officers, employees and directors of, and consultants to, the Company and its subsidiaries and affiliates, (ii) motivating those individuals by means of performance-related incentives to achieve long-range performance goals, (iii) enabling such individuals to participate in the long-term growth and financial success of the Company, (iv) encouraging ownership of stock in the Company by such individuals, and (v) linking their compensation to the long-term interests of the Company and its shareholders. Except for certain limitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and restricted share units, performance awards and other stock-based awards. As of December 31, 2016, the Company has 610,003 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of December 31, 2016, the Company had granted 60,832 non-qualified stock options and 79,165 cash settled stock appreciation rights each with a weighted average price of $40.36.
The fair value of each stock option and cash settled SAR grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2016, 2015 and 2014:
2016 | 2015 | 2014 | ||||||
Expected dividends | 1.21 | % | 1.00 | % | 1.11 | % | ||
Expected term (in years) | 8.71 | 8.96 | 9.33 | |||||
Expected volatility | 26 | % | 22 | % | 23 | % | ||
Risk-free rate | 2.02 | % | 2.02 | % | 2.62 | % | ||
The expected stock price volatility is based on historical volatility adjusted for consideration of other relevant factors. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.
A summary of the stock option and SAR activity for 2016, 2015 and 2014 is as follows:
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
2016 | 2015 | 2014 | ||||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||
Outstanding at beginning of year | 49,895 | $ | 30.19 | 58,092 | $ | 28.52 | 63,539 | $ | 27.32 | |||||||||||
Granted | 140,997 | 40.36 | 4,333 | 36.23 | 4,333 | 34.31 | ||||||||||||||
Exercised | (5,545 | ) | 27.38 | (10,177 | ) | 23.69 | (8,192 | ) | 22.68 | |||||||||||
Forfeited or expired | (1,500 | ) | 28.44 | (2,353 | ) | 28.22 | (1,588 | ) | 26.52 | |||||||||||
Outstanding at end of year | 183,847 | $ | 38.08 | 49,895 | $ | 30.19 | 58,092 | $ | 28.52 | |||||||||||
Options and SARs exercisable at year end | 13,553 | $ | 29.29 | 13,085 | $ | 28.55 | 16,085 | $ | 25.94 | |||||||||||
The following table summarizes information about stock options and SARs for the year ended December 31, 2016:
Options and SARs Outstanding | Options and SARs Exercisable | ||||||||||||||||||
Range of Exercise Prices | Number Outstanding at 12/31/16 | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Number Exercisable at 12/31/16 | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | |||||||||||||
$ 22.22 - $ 33.56 | 33,451 | $ | 29.33 | 3.70 years | 12,453 | $ | 28.78 | 3.28 years | |||||||||||
$ 33.94 - $ 40.75 | 150,396 | $ | 40.03 | 9.67 years | 1,100 | $ | 35.06 | 7.57 years | |||||||||||
183,847 | 13,553 | ||||||||||||||||||
Aggregate intrinsic value (in thousands) | $ | 490 | $ | 155 | |||||||||||||||
Shares | Weighted Average Grant Date Fair Value | ||||
Non-vested options and SARs at January 1, 2016 | 36,810 | 7.14 | |||
Granted | 140,997 | 11.29 | |||
Vested | (6,646 | ) | 5.95 | ||
Forfeited | (867 | ) | 5.93 | ||
Non-vested options and SARs at December 31, 2016 | 170,294 | 10.63 | |||
The weighted average fair value at the grant date of options and SARs granted during the years 2016, 2015 and 2014 was $11.29, $12.72 and $13.41, respectively. The total intrinsic value of options and SARs exercised during the years 2016, 2015 and 2014 was $65,000, $129,000 and $99,000, respectively.
As of December 31, 2016, there was $1,784,000 of total unrecognized cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. The cost is expected to be recognized over a weighted-average period of 4.9 years.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(19) | Earnings Per Share |
The following is a summary of the components comprising basic and diluted earnings per share (“EPS”):
In Thousands (except share data) | |||||||||
2016 | 2015 | 2014 | |||||||
Basic EPS Computation: | |||||||||
Numerator - Earnings available to common stockholders | $ | 25,633 | 23,863 | 20,777 | |||||
Denominator - Weighted average number of common shares outstanding | 10,279,332 | 10,165,477 | 10,062,783 | ||||||
Basic earnings per common share | $ | 2.49 | 2.35 | 2.06 | |||||
Diluted EPS Computation: | |||||||||
Numerator - Earnings available to common stockholders | $ | 25,633 | 23,863 | 20,777 | |||||
Denominator: | |||||||||
Weighted average number of common shares outstanding | 10,279,332 | 10,165,477 | 10,062,783 | ||||||
Dilutive effect of stock options | 4,996 | 4,703 | 5,857 | ||||||
10,284,328 | 10,170,180 | 10,068,640 | |||||||
Diluted earnings per common share | $ | 2.49 | 2.35 | 2.06 | |||||
(20) | Disclosures About Fair Value of Financial Instruments |
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.
Valuation Hierarchy
FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• | Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets |
• | Level 2 - inputs to the valuation methodology include all prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
• | Level 3 - inputs to the valuation methodology that are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Assets
Securities available-for-sale - Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.
Impaired loans - 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 agreement. 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 less selling costs if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower’s underlying financial condition.
Other real estate owned - Other real estate owned (“OREO”) represents real estate foreclosed upon by the Company through loan defaults by customers or acquired in lieu of foreclosure. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for loan losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest income or noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value. Appraisal values are property-specific and sensitive to the changes in the overall economic environment.
Other assets - Included in other assets are certain assets carried at fair value, including the cash surrender value of bank owned life insurance policies. The Company uses financial information received from insurance carriers indicating the performance of the insurance policies and cash surrender values in determining the carrying value of life insurance. The Company reflects these assets within Level 3 of the valuation hierarchy due to the unobservable inputs included in the valuation of these items. The Company does not consider the fair values of these policies to be materially sensitive to changes in these unobservable inputs.
Mortgage loans held for sale - Mortgage loans held for sale are carried at fair value. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.
The following tables present the financial instruments carried at fair value as of December 31, 2016 and December 31, 2015, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above) (in thousands):
Measured on a Recurring Basis | ||||||||||||
Total Carrying Value in the Consolidated Balance Sheet | Quoted Market Prices in an Active Market (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Models with Significant Unobservable Market Parameters (Level 3) | |||||||||
December 31, 2016 | ||||||||||||
Investment securities available-for-sale: | ||||||||||||
U.S. Government sponsored enterprises | $ | 59,488 | — | 59,488 | — | |||||||
Mortgage-backed securities | 164,365 | — | 164,365 | — | ||||||||
Asset-backed securities | 36,857 | — | 36,857 | — | ||||||||
State and municipal securities | 51,875 | — | 51,875 | — | ||||||||
Total investment securities available-for-sale | 312,585 | — | 312,585 | — | ||||||||
Loans held for sale | 14,788 | — | 14,788 | — | ||||||||
Other assets | 28,616 | — | — | 28,616 | ||||||||
Total assets at fair value | $ | 355,989 | — | 327,373 | 28,616 | |||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
Measured on a Recurring Basis | ||||||||||||
Total Carrying Value in the Consolidated Balance Sheet | Quoted Market Prices in an Active Market (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Models with Significant Unobservable Market Parameters (Level 3) | |||||||||
December 31, 2015 | ||||||||||||
Investment securities available-for-sale: | ||||||||||||
U.S. Government sponsored enterprises | $ | 76,909 | — | 76,909 | — | |||||||
Mortgage-backed securities | 191,915 | — | 191,915 | — | ||||||||
Asset-backed securities | 31,034 | — | 31,034 | — | ||||||||
State and municipal securities | 31,270 | — | 31,270 | — | ||||||||
Total investment securities available-for-sale | 331,128 | — | 331,128 | — | ||||||||
Loans held for sale | 10,135 | — | 10,135 | — | ||||||||
Other assets | 26,672 | — | — | 26,672 | ||||||||
Total assets at fair value | $ | 367,935 | — | 341,263 | 26,672 | |||||||
Measured on a Non-Recurring Basis | ||||||||||||
Total Carrying Value in the Consolidated Balance Sheet | Quoted Market Prices in an Active Market (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Models with Significant Unobservable Market Parameters (Level 3) | |||||||||
December 31, 2016 | ||||||||||||
Other real estate owned | $ | 4,527 | — | — | 4,527 | |||||||
Impaired loans, net (¹) | 6,792 | — | — | 6,792 | ||||||||
Total | $ | 11,319 | — | — | 11,319 | |||||||
December 31, 2015 | ||||||||||||
Other real estate owned | $ | 5,410 | — | — | 5,410 | |||||||
Impaired loans, net (¹) | 8,436 | — | — | 8,436 | ||||||||
Total | $ | 13,846 | — | — | 13,846 | |||||||
(1) | Amount is net of a valuation allowance of $316,000 at December 31, 2016 and $194,000 at December 31, 2015 as required by ASC 310, “Receivables.” |
In the case of its investment securities portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the twelve months ended December 31, 2016, there were no transfers between Levels 1, 2 or 3.
The table below includes a rollforward of the balance sheet amounts for the year ended December 31, 2016 and 2015 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
For the Year Ended December 31, | |||||||||||||
2016 | 2015 | ||||||||||||
Other Assets | Other Liabilities | Other Assets | Other Liabilities | ||||||||||
Fair value, January 1 | $ | 17,733 | — | $ | 13,344 | — | |||||||
Total realized gains included in income | 673 | — | 532 | — | |||||||||
Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at December 31 | — | — | — | — | |||||||||
Purchases, issuances and settlements, net | 10,210 | — | 3,857 | — | |||||||||
Transfers out of Level 3 | — | — | — | — | |||||||||
Fair value, December 31 | $ | 28,616 | — | $ | 17,733 | — | |||||||
Total realized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at December 31 | $ | 673 | — | $ | 532 | — | |||||||
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2016 and December 31, 2015. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Held-to-maturity securities - Estimated fair values for held-to-maturity investment securities are based on quoted market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics.
Loans - The fair value of our loan portfolio includes a credit risk factor in the determination of the fair value of our loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Our loan portfolio is initially fair valued using a segmented approach. We divide our loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk.
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exit price.
Deposits and Securities sold under agreements to repurchase - Fair values for deposits are estimated using discounted cash flow models, using current market interest rates offered on deposits with similar remaining maturities.
Off-Balance Sheet Instruments - The fair values of the Company’s off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to the Company until such commitments are funded.
The following table presents the carrying amounts, estimated fair value and placement in the fair value hierarchy of the Company’s financial instruments at December 31, 2016 and December 31, 2015. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(in Thousands) | Carrying/ Notional Amount | Estimated Fair Value (¹) | Quoted Market Prices in an Active Market (Level 1) | Models with Significant Observable Market Parameters (Level 2) | Models with Significant Unobservable Market Parameters (Level 3) | ||||||||||
December 31, 2016 | |||||||||||||||
Financial assets: | |||||||||||||||
Securities held-to-maturity | $ | 36,624 | 36,145 | — | 36,145 | — | |||||||||
Loans, net | 1,667,088 | 1,673,568 | — | — | 1,673,568 | ||||||||||
Financial liabilities: | |||||||||||||||
Deposits and securities sold under agreements to repurchase | 1,942,871 | 1,631,032 | — | — | 1,631,032 | ||||||||||
Off-balance sheet instruments: | |||||||||||||||
Commitments to extend credit | — | — | — | — | — | ||||||||||
Standby letters of credit | — | — | — | — | — | ||||||||||
December 31, 2015 | |||||||||||||||
Financial assets: | |||||||||||||||
Securities held-to-maturity | $ | 28,195 | 28,365 | — | 28,365 | — | |||||||||
Loans, net | 1,443,179 | 1,443,738 | — | — | 1,443,738 | ||||||||||
Financial liabilities: | |||||||||||||||
Deposits and securities sold under agreements to repurchase | 1,791,885 | 1,549,414 | — | — | 1,549,414 | ||||||||||
Off-balance sheet instruments: | |||||||||||||||
Commitments to extend credit | — | — | — | — | — | ||||||||||
Standby letters of credit | — | — | — | — | — | ||||||||||
(1) | Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a market-participant would realize in a hypothetical orderly transaction. |
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(21) | Wilson Bank Holding Company - |
Parent Company Financial Information
WILSON BANK HOLDING COMPANY
(Parent Company Only)
Balance Sheets
December 31, 2016 and 2015
Dollars In Thousands | ||||||||
2016 | 2015 | |||||||
ASSETS | ||||||||
Cash | $ | 1,678 | * | 1,685 | * | |||
Investment in wholly-owned commercial bank subsidiary | 242,808 | * | 221,555 | * | ||||
Refundable income taxes | 169 | 198 | ||||||
Total assets | $ | 244,655 | 223,438 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Stock appreciation rights payable | $ | 35 | — | |||||
Total liabilities | $ | 35 | — | |||||
Stockholders’ equity: | ||||||||
Common stock, par value $2.00 per share, authorized 50,000,000 and 15,000,000 shares, respectively, 10,319,673 and 7,652,144 shares issued and outstanding, respectively | $ | 20,639 | 15,304 | |||||
Additional paid-in capital | 60,541 | 61,339 | ||||||
Retained earnings | 167,523 | 147,646 | ||||||
Net unrealized losses on available-for-sale securities, net of income taxes of $2,533 and $527, respectively | (4,083 | ) | (851 | ) | ||||
Total stockholders’ equity | 244,620 | 223,438 | ||||||
Total liabilities and stockholders’ equity | $ | 244,655 | 223,438 | |||||
* | Eliminated in consolidation. |
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
WILSON BANK HOLDING COMPANY
(Parent Company Only)
Statements of Earnings and Comprehensive Earnings
Three Years Ended December 31, 2016
Dollars In Thousands | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Expenses: | ||||||||||||
Directors’ fees | $ | 327 | 350 | 351 | ||||||||
Other | 194 | 152 | 191 | |||||||||
Loss before Federal income tax benefits and equity in undistributed earnings of commercial bank subsidiary | (521 | ) | (502 | ) | (542 | ) | ||||||
Federal income tax benefits | 169 | 198 | 212 | |||||||||
(352 | ) | (304 | ) | (330 | ) | |||||||
Equity in undistributed earnings of commercial bank subsidiary | 25,985 | * | 24,167 | * | 21,107 | * | ||||||
Net earnings | 25,633 | 23,863 | 20,777 | |||||||||
Other comprehensive earnings (losses), net of tax: | ||||||||||||
Net unrealized gains (losses) on available-for-sale- securities arising during period, net of taxes of $1,830, $35, and $2,454, respectively | (2,948 | ) | (58 | ) | 3,953 | |||||||
Reclassification adjustments for net gains included in net earnings, net of taxes of $176, $71, and $209 respectively | (284 | ) | (114 | ) | (336 | ) | ||||||
Other comprehensive earnings (losses) | (3,232 | ) | (172 | ) | 3,617 | |||||||
Comprehensive earnings | $ | 22,401 | 23,691 | 24,394 | ||||||||
* | Eliminated in consolidation |
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
WILSON BANK HOLDING COMPANY
(Parent Company Only)
Statements of Changes in Stockholders’ Equity
Three Years Ended December 31, 2016
Dollars In Thousands | |||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings | Net Unrealized Gain (Loss) On Available-For-Sale Securities | Total | |||||||||||
Balance December 31, 2013 | $ | 14,997 | 54,519 | 112,451 | (4,296 | ) | 177,671 | ||||||||
Cash dividends declared, $.45 per share | — | — | (4,510 | ) | — | (4,510 | ) | ||||||||
Issuance of 69,289 shares of stock pursuant to dividend reinvestment plan | 139 | 3,065 | — | — | 3,204 | ||||||||||
Issuance of 6,144 shares of stock pursuant to exercise of stock options | 12 | 174 | — | — | 186 | ||||||||||
Share based compensation expense | — | 41 | — | — | 41 | ||||||||||
Net change in fair value of available-for-sale securities during the year, net of taxes of $2,245 | — | — | — | 3,617 | 3,617 | ||||||||||
Repurchase of 2,053 common shares | (4 | ) | (90 | ) | — | — | (94 | ) | |||||||
Net earnings for the year | — | — | 20,777 | — | 20,777 | ||||||||||
Balance December 31, 2014 | 15,144 | 57,709 | 128,718 | (679 | ) | 200,892 | |||||||||
Cash dividends declared, $.49 per share | — | — | (4,935 | ) | — | (4,935 | ) | ||||||||
Issuance of 72,543 shares of stock pursuant to dividend reinvestment plan | 145 | 3,366 | — | — | 3,511 | ||||||||||
Issuance of 7,633 shares of stock pursuant to exercise of stock options | 15 | 226 | — | — | 241 | ||||||||||
Share based compensation expense | — | 38 | — | — | 38 | ||||||||||
Net change in fair value of available-for-sale securities during the year, net of taxes of $106 | — | — | — | (172 | ) | (172 | ) | ||||||||
Net earnings for the year | — | — | 23,863 | — | 23,863 | ||||||||||
Balance December 31, 2015 | 15,304 | 61,339 | 147,646 | (851 | ) | 223,438 | |||||||||
Cash dividends declared, $.56 per share | — | — | (5,756 | ) | — | (5,756 | ) | ||||||||
Issuance of 98,318 shares of stock pursuant to dividend reinvestment plan | 197 | 4,119 | — | — | 4,316 | ||||||||||
Issuance of 5,120 shares of stock pursuant to exercise of stock options | 10 | 142 | — | — | 152 | ||||||||||
Issuance of 2,564,091 shares of common stock pursuant to a 4 for 3 stock split | 5,128 | (5,128 | ) | — | — | — | |||||||||
Share based compensation expense | — | 69 | — | — | 69 | ||||||||||
Net change in fair value of available-for-sale securities during the year, net of taxes of $2,006 | — | — | — | (3,232 | ) | (3,232 | ) | ||||||||
Net earnings for the year | — | — | 25,633 | — | 25,633 | ||||||||||
Balance December 31, 2016 | $ | 20,639 | 60,541 | 167,523 | (4,083 | ) | 244,620 | ||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
WILSON BANK HOLDING COMPANY
(Parent Company Only)
Statements of Cash Flows
Three Years Ended December 31, 2016
Increase (Decrease) in Cash and Cash Equivalents
Dollars In Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Cash flows from operating activities: | |||||||||
Cash paid to suppliers and other | $ | (417 | ) | (464 | ) | (501 | ) | ||
Tax benefits received | 198 | 212 | 173 | ||||||
Net cash used in operating activities | (219 | ) | (252 | ) | (328 | ) | |||
Cash flows from investing activities: | |||||||||
Dividends received from commercial bank subsidiary | 1,500 | 2,000 | — | ||||||
Net cash provided by investing activities | 1,500 | 2,000 | — | ||||||
Cash flows from financing activities: | |||||||||
Dividends paid | (5,756 | ) | (4,935 | ) | (4,510 | ) | |||
Proceeds from sale of stock pursuant to dividend reinvestment | 4,316 | 3,511 | 3,204 | ||||||
Proceeds from exercise of stock options | 152 | 241 | 186 | ||||||
Common shares repurchased | — | — | (94 | ) | |||||
Net cash used in financing activities | (1,288 | ) | (1,183 | ) | (1,214 | ) | |||
Net increase (decrease) in cash and cash equivalents | (7 | ) | 565 | (1,542 | ) | ||||
Cash and cash equivalents at beginning of year | 1,685 | 1,120 | 2,662 | ||||||
Cash and cash equivalents at end of year | $ | 1,678 | 1,685 | 1,120 | |||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
WILSON BANK HOLDING COMPANY
(Parent Company Only)
Statements of Cash Flows, Continued
Three Years Ended December 31, 2016
Increase (Decrease) in Cash and Cash Equivalents
Dollars in Thousands | |||||||||
2016 | 2015 | 2014 | |||||||
Reconciliation of net earnings to net cash used in operating activities: | |||||||||
Net earnings | $ | 25,633 | 23,863 | 20,777 | |||||
Adjustments to reconcile net earnings to net cash used in operating activities: | |||||||||
Equity in earnings of commercial bank subsidiary | (25,985 | ) | (24,167 | ) | (21,107 | ) | |||
Decrease (increase) in refundable income taxes | 29 | 14 | (39 | ) | |||||
Share based compensation expense | 104 | 38 | 41 | ||||||
Total adjustments | (25,852 | ) | (24,115 | ) | (21,105 | ) | |||
Net cash used in operating activities | $ | (219 | ) | (252 | ) | (328 | ) | ||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(22) | Quarterly Financial Data (Unaudited) |
Selected quarterly results of operations for the four quarters ended December 31 are as follows:
(In Thousands, except per share data) | ||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||
Fourth Quarter | Third Quarter | Second Quarter | First Quarter | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||||||||||||||||||||
Interest income | $ | 22,078 | 21,454 | 20,877 | 20,337 | $ | 20,213 | 19,982 | 19,617 | 19,027 | $ | 19,180 | 18,980 | 18,286 | 17,934 | |||||||||||||||||||||||
Interest expense | 1,990 | 2,077 | 2,106 | 2,111 | 2,087 | 2,114 | 2,191 | 2,216 | 2,397 | 2,426 | 2,437 | 2,508 | ||||||||||||||||||||||||||
Net interest income | 20,088 | 19,377 | 18,771 | 18,226 | 18,126 | 17,868 | 17,426 | 16,811 | 16,783 | 16,554 | 15,849 | 15,426 | ||||||||||||||||||||||||||
Provision for loan losses | 89 | 141 | 82 | 67 | 123 | 109 | 81 | 75 | 134 | 87 | 28 | 249 | ||||||||||||||||||||||||||
Earnings before income taxes | 10,120 | 11,095 | 10,162 | 9,097 | 8,720 | 9,862 | 9,889 | 9,154 | 8,888 | 8,772 | 8,503 | 6,924 | ||||||||||||||||||||||||||
Net earnings | 6,802 | 6,918 | 6,270 | 5,643 | 5,958 | 6,088 | 6,201 | 5,616 | 6,100 | 5,351 | 5,154 | 4,172 | ||||||||||||||||||||||||||
Basic earnings per common share | 0.66 | 0.67 | 0.61 | 0.55 | 0.59 | 0.60 | 0.61 | 0.55 | 0.61 | 0.53 | 0.51 | 0.41 | ||||||||||||||||||||||||||
Diluted earnings per common share | 0.66 | 0.67 | 0.61 | 0.55 | 0.59 | 0.60 | 0.61 | 0.55 | 0.61 | 0.53 | 0.51 | 0.41 | ||||||||||||||||||||||||||
WILSON BANK HOLDING COMPANY
Notes to Consolidated Financial Statements, Continued
December 31, 2016, 2015 and 2014
(23) | Subsequent Events |
ASC Topic 855, Subsequent Events, as amended by ASU No. 2010-90, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after December 31, 2016, through the date of the issued financial statements. During this period there were no material recognizable subsequent events that required recognition in our disclosures to the December 31, 2016 financial statements.