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EX-32.2 - EXHIBIT 32.2 - WILSON BANK HOLDING COexhibit32212312017.htm
EX-32.1 - EXHIBIT 32.1 - WILSON BANK HOLDING COexhibit32112312017.htm
EX-31.2 - EXHIBIT 31.2 - WILSON BANK HOLDING COexhibit31212312017.htm
EX-31.1 - EXHIBIT 31.1 - WILSON BANK HOLDING COexhibit31112312017.htm
EX-23.1 - EXHIBIT 23.1 - WILSON BANK HOLDING COexhibit23112312017.htm
EX-21.1 - EXHIBIT 21.1 - WILSON BANK HOLDING COexhibit21112312017.htm
10-K - 10-K - WILSON BANK HOLDING COwbhc2017123110-k.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, 2017, 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) the impact of increased competition with other financial institutions, including pricing pressures (including those resulting from the Tax Cuts and Jobs Act), and the resulting impact on the Company's results, including as a result of compression to net interest margin (iv) the deterioration of the economy in the Company’s market areas, (v) fluctuations in interest rates on loans or deposits that affect the yield curve, (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, and the systems of parties with whom the Company contracts, 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; (xv) loss of key personnel; and (xvi) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future obligatory litigation, examinations or other legal and/or regulatory actions. 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, Davidson County, Putnam County, and Sumner County, Tennessee as its primary market areas. Generally, this market is the Nashville-Davidson-Murfreesboro-Franklin, Tennessee metropolitan statistical area. At December 31, 2017, Wilson Bank had twenty-seven 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 Company's consolidated financial statements for the year ended December 31, 2017 included 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 in 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.
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 to the Company's consolidated financial statements for the year ended


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

December 31, 2017 included in the Company's Annual Report on Form 10-K. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Results of Operations
Net earnings for the year ended December 31, 2017 were $23,526,000, a decrease of $2,107,000, or 8.22%, compared to net earnings of $25,633,000 for 2016. Our 2016 net earnings were 7.42%, or $1,770,000, above our net earnings of $23,863,000 for 2015. Basic earnings per share were $2.26 in 2017, compared with $2.49 in 2016 and $2.35 in 2015. Diluted earnings per share were $2.26 in 2017, compared to $2.49 in 2016 and $2.35 in 2015. Net income and diluted and basic earnings per share were significantly and negatively impacted by the revaluation of the Company's deferred tax assets triggered by the passage of the Tax Cuts and Jobs Act in late December 2017. Net yield on earning assets for the year ended December 31, 2017 was 3.84%, compared to 3.82% and 3.83% for the years ended December 31, 2016 and December 31, 2015, respectively. Net interest spread for the year ended December 31, 2017 was 3.75%, compared to 3.73% and 3.74% for the years ended December 31, 2016 and December 31, 2015, 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 2017 was $91,020,000, compared with $84,746,000 in 2016 and $78,839,000 in 2015, in each case excluding tax exempt adjustments relating to tax exempt securities and loans. The increase in total interest income in 2017 when compared to 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 average loan yields from 4.94% to 4.84% resulting from competition in our market area. The ratio of average earning assets to total average assets was 95.4%, 95.6% and 95.7% for each of the years ended December 31, 2017, 2016 and 2015, respectively. Average earning assets increased $136,903,000 from December 31, 2016 to December 31, 2017. The average rate earned on earning assets for 2017 was 4.25%, compared with 4.23% in 2016 and 4.30% in 2015.
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 $117,000 in 2017, $202,000 in 2016 and $291,000 in 2015.
Total interest expense for 2017 was $8,889,000, an increase of $605,000, or 7.30%, compared to total interest expense of $8,284,000 in 2016. The increase in 2017 was primarily due to an increase in the average rates paid on deposits, other than NOW accounts, that began to take effect late in the second quarter of 2017, resulting from an increase in short-term interest rates and competition in our market area, as well as an overall increase in the volume of average interest bearing deposits. Total interest expense decreased from $8,608,000 in 2015 to $8,284,000 in 2016, a decrease of $324,000, or 3.76%, 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.
Net interest income for 2017 totaled $82,131,000 as compared to $76,462,000 and $70,231,000 in 2016 and 2015, 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 3.75% in 2017 from 3.73% in 2016. The net interest spread was 3.74% in 2015. Net yield on earning assets increased to 3.84% in 2017 from 3.82% in 2016. The net yield on earning assets was 3.83% in 2015. The nominal change in net yield on earning assets resulted from management's ability to invest in higher yielding securities offset by a decrease in loan yields due to the competition in our market area. 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, but are also impacted by competitive market conditions. 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 (like the one currently contemplated) 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, just as loan pricing pressure from competition within our markets continues to negatively impact loan yields. This pressure could negatively impact the Company’s net interest margin and earnings if short-term rates begin to rise.


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 2017 provision for loan losses was $1,681,000, an increase of $1,302,000 from the provision of $379,000 in 2016, which was $9,000 lower than the provision in 2015. The increase in the provision for the year ended December 31, 2017 reflects an overall growth in the loan portfolio in 2017 of 3.63% and management's decision to increase quantitative factors to account for the rising rate environment and adding an additional qualitative factor for construction loans managed outside of the Credit Administration area. Management continues to fund the allowance for loan losses through provisions based on management’s calculation of the allowance for loan losses. 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 a determination is made that the loan is uncollectible. Net charge-offs decreased to $503,000 in 2017 from $548,000 in 2016 due to the recovery of several smaller loans that were charged off in 2016. Net charge-offs in 2015 totaled $60,000. The ratio of net charge-offs to average total outstanding loans was 0.03% in 2017, 0.04% in 2016 and 0.004% in 2015. Overall, Wilson Bank has continued to experience a stabilization in past dues and nonaccruals and is experiencing fewer foreclosures than it experienced in the recession.
The decrease in net charge-offs and increase in provision for loan losses resulted in an increase of the allowance for loan losses (net of charge-offs and recoveries) to $23,909,000 at December 31, 2017 from $22,731,000 at December 31, 2016 and $22,900,000 at December 31, 2015. The allowance for loan losses increased 5.18% between December 31, 2016 and December 31, 2017 as compared to the 3.63% increase in total loans over the same period, reflecting management's decision to update qualitative factors related to the allowance. The allowance for loan losses was 1.37% of total loans outstanding at December 31, 2017 compared to 1.35% at December 31, 2016 and 1.56% at December 31, 2015. As a percentage of nonperforming loans at December 31, 2017, 2016 and 2015, the allowance for loan losses represented 493%, 340% and 242%, respectively. The internally classified loans as a percentage of the allowance for loan losses were 67.8% and 71.1%, respectively, at December 31, 2017 and 2016.
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, 2017 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 expense 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 (losses) 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 2017 was $22,836,000, compared with $21,728,000 in 2016 and $19,941,000 in 2015. The 5.10% increase from 2016 was primarily due to an increase in service charges on deposits, an increase in other fees and commissions, and an increase in income on BOLI offset in part by a decrease on the gain on sale of loans, a decrease on the gain on sale of other real estate and a decrease on the gain on sale of securities. Other fees and commissions increased $1,492,000, or 14.5%, in 2017 to $11,752,000 when compared to 2016. Other fees and commissions include income on brokerage accounts, debit card interchange fee income, and various other fees. The increase in other fees and commissions is due to an increase in debit card interchange fee income resulting from an increase in the number and volume of debit card holders and transactions, respectively. Fees and gains on sales of loans decreased $97,000 in 2017 to $4,258,000 when compared to 2016. The service charges on deposit accounts increased $355,000, or 6.15%, to $6,124,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to an increase in the number of consumer checking accounts. During 2017, management began to strategically restructure its investment securities portfolio by selling lower yielding non-pledgable securities and using


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

the funds from the sales to replace the sold securities with higher yielding pledgable securities. As a result, the gain (loss) on sale of securities decreased $635,000, or 138.04%, to a loss of $175,000 in 2017 when compared to a gain of $460,000 in 2016.

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 home mortgage market and stock market conditions and fluctuate more widely from period to period.
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 2017 increased 5.35% to $60,406,000 from $57,337,000 in 2016. Non-interest expenses for 2016 were up 9.93% over non-interest expenses in 2015 which totaled $52,159,000. The increase in non-interest expenses in 2017 is primarily attributable to a year-over year increase in salaries and employee benefits of $1,724,000 and other operating expenses of $711,000. Salaries and employee benefits were up in 2017 when compared to 2016 because the number of employees continued to increase in order to support the Company's growth in operations and new branch expansions. The increase in other operating expenses is due to increased account servicing costs associated with an increase in consumer checking accounts. Occupancy expenses for 2017 increased $80,000, or 2.20% from 2016 due to the opening of a new branch in Rutherford County in January 2017 and the initial lease payments and the expenses relating to a new branch that opened in Davidson County in the third quarter of 2017. The Company anticipates that salaries and employee benefits expense and occupancy expense will continue to increase as the Company's operations grow.
Income Taxes

The Company’s income tax expense was $19,354,000 for 2017, an increase of $4,513,000 from $14,841,000 for 2016, which was up by $1,079,000 from the 2015 total of $13,762,000. The percentage of income tax expense to earnings before taxes was 45.1% in 2017, 36.7% in 2016 and 36.6% in 2015. The increase in income tax expense as well as the percentage of income expense to earnings before taxes is primarily due to the recent changes in statutory corporate tax rates. On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the "Act"), a tax reform bill which, among other items, reduces the current corporate federal tax rate to 21% from 35%. The rate reduction is effective January 1, 2018. The Company concluded that the Act caused the Company's deferred tax assets to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. During the fourth quarter of 2017, we reduced the value of our deferred tax assets by $3.6 million and recorded an additional income tax expense, thus causing the increase in income tax expense from 2016 to 2017.
Our income tax expense, deferred tax assets and liabilities 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 as was the case with the passage of the Act.
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.


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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, 2017, 2016 and 2015: 
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(Dollars in Thousands except per share amounts)
Basic EPS Computation:
 
 
 
 
 
Numerator – Earnings available to common stockholders
$
23,526

 
25,633

 
23,863

Denominator – Weighted average number of common shares outstanding
10,407,211

 
10,279,332

 
10,165,477

Basic earnings per common share
$
2.26

 
2.49

 
2.35

Diluted EPS Computation:
 
 
 
 
 
Numerator – Earnings available to common stockholders
$
23,526

 
25,633

 
23,863

Denominator – Weighted average number of common shares outstanding
10,407,211

 
10,279,332

 
10,165,477

Dilutive effect of stock options
5,325

 
4,996

 
4,703

 
10,412,536

 
10,284,328

 
10,170,180

Diluted earnings per common share
$
2.26

 
2.49

 
2.35

Financial Condition
Balance Sheet Summary
The Company’s total assets increased by $118,982,000, or 5.41%, to $2,317,033,000 at December 31, 2017, after increasing 8.73% in 2016 to $2,198,051,000 at December 31, 2016. Loans, net of allowance for loan losses, totaled $1,727,253,000 at December 31, 2017, a 3.61% increase compared to December 31, 2016. The increase in loans resulted from an overall increase in demand for construction loans and 1-4 family residential real estate loans, along with an increase in marketing efforts that concentrated on increasing the volume of loans. We operate in a market area that is experiencing economic growth, particularly growth in new jobs due to the opening of several new distribution centers which caused our construction and residential 1-4 family portfolios to increase as of December 31, 2017, when compared to December 31, 2016. At year end 2017, securities totaled $365,196,000, an increase of 4.58% from $349,209,000 at December 31, 2016, primarily as a result of management's decision to reinvest excess liquidity, that resulted from deposit growth outpacing loan growth, into higher yielding assets.
Total liabilities increased by $95,872,000, or 4.91%, to $2,049,303,000 at December 31, 2017 compared to $1,953,431,000 at December 31, 2016. This increase was composed primarily of the $95,610,000 increase in total deposits to $2,037,745,000, a 4.92% increase from December 31, 2016. Securities sold under repurchase agreements increased to $864,000 from $736,000 at the respective year ends 2017 and 2016.
Stockholders’ equity increased $23,110,000, or 9.45%, in 2017, due to net earnings, the issuance of stock pursuant to the Company’s Dividend Reinvestment Plan, and changes in unrealized loss on available-for-sale securities, offset by dividends paid on the


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Company’s common stock. The change in stockholders’ equity includes a $152,000 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.
Loans
Loan category amounts and the percentage of loans in each category to total loans are as follows:
 
 
December 31, 2017

 
December 31, 2016

 
(Dollar Amounts in Thousands)
 
(Dollar Amounts in Thousands)
 
AMOUNT
 
PERCENTAGE
 
AMOUNT
 
PERCENTAGE
Commercial, financial and agricultural
$
59,797

 
3.4
%
 
$
50,918

 
3.0
%
Installment and other
43,009

 
2.4

 
44,274

 
2.6

Real estate – mortgage
1,263,696

 
71.9

 
1,303,918

 
76.9

Real estate – construction
392,039

 
22.3

 
297,315

 
17.5

Total
$
1,758,541

 
100.0
%
 
$
1,696,425

 
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 3.61% at year end 2017 when compared to year end 2016. 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, 2017 and 2016.
As represented in the table, Wilson Bank experienced loan growth for the year ended December 31, 2017 in the commercial, financial and agricultural and real estate construction loan categories, offset by a slight decrease in real estate mortgage loans and installment and other. Real estate mortgage loans decreased 3.08% in 2017 and comprised 71.9% of the total loan portfolio at December 31, 2017, compared to 76.9% at December 31, 2016. Management believes the decrease in real estate mortgage loans was primarily due to competition in our market areas as well as slight rate increases initiated by the Federal Reserve. Installment loans decreased 2.86% in 2017 and comprised 2.4% of the total loan portfolio at December 31, 2017, compared to 2.6% at December 31, 2016. Commercial, financial, and agricultural loans increased 17.44% in 2017 and comprised 3.4% of the total loan portfolio at December 31, 2017, compared to 3.0% at December 31, 2016. Real estate construction loans increased 31.86% in 2017 and comprised 22.3% of the portfolio at December 31, 2017, compared to 17.5% at December 31, 2016. The increase in real estate construction loans during 2017 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 diversify its real estate portfolio to avoid having concentrations in any one type of loan. In addition, as discussed above, the Company has added an additional qualitative factor to its evaluation of the provision for loan losses for construction loans managed outside of the Credit Administration area.
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, 2017, the Company had no highly leveraged transactions, and there were no foreign loans outstanding during any of the reporting periods. As of December 31, 2017, 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, 2017 and December 31, 2016.
 
Loans on Nonaccrual Status
In Thousands
 
2017
 
2016
Residential 1-4 family
$

 
$

Multifamily

 

Commercial real estate
1,729

 
3,255

Construction

 

Farmland
310

 
310

Second mortgages

 

Equity lines of credit

 

Commercial

 

Agricultural, installment and other
1

 

Total
$
2,040

 
$
3,565




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, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
3,631

 
524

 
673

 
4,828

 
401,839

 
406,667

 
$
673

Multifamily

 

 

 

 
91,992

 
91,992

 

Commercial real estate

 
83

 
1,729

 
1,812

 
659,411

 
661,223

 

Construction
433

 

 
113

 
546

 
391,493

 
392,039

 
113

Farmland
112

 

 
310

 
422

 
33,790

 
34,212

 

Second mortgages

 

 
2

 
2

 
8,950

 
8,952

 
2

Equity lines of credit

 

 
41

 
41

 
60,609

 
60,650

 
41

Commercial
2

 
137

 

 
139

 
47,800

 
47,939

 

Agricultural, installment and other
432

 
57

 
149

 
638

 
54,229

 
54,867

 
148

Total
$
4,610

 
801

 
3,017

 
8,428

 
1,750,113

 
1,758,541

 
$
977

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
3,311

 
1,307

 
1,434

 
6,052

 
387,216

 
393,268

 
$
1,434

Multifamily

 

 

 

 
109,410

 
109,410

 

Commercial real estate
41

 
175

 
3,335

 
3,551

 
686,144

 
689,695

 
80

Construction
1,872

 
53

 
22

 
1,947

 
295,368

 
297,315

 
22

Farmland
56

 
1,163

 
410

 
1,629

 
44,685

 
46,314

 
100

Second Mortgages
177

 

 
11

 
188

 
9,005

 
9,193

 
11

Equity Lines of Credit
40

 
148

 
17

 
205

 
55,833

 
56,038

 
17

Commercial
37

 
4

 

 
41

 
40,260

 
40,301

 

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






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 $3,017,000 at December 31, 2017, a decrease from $5,372,000 at December 31, 2016, resulting from a $1,525,000, or 42.78%, decrease in nonaccrual loans and a $830,000, or 45.93%, decrease in 90 day past due and accruing loans. The decrease in non-performing loans during the year ended December 31, 2017 of $2,355,000 was due primarily to a decrease in non-performing commercial real estate mortgage loans of $1,606,000 and a decrease in non-performing residential 1-4 family real estate loans of $761,000. The decrease in non-performing commercial real estate mortgage loans resulted primarily from the pay down of one large commercial real estate loan on nonaccrual status. The decrease in non-performing residential 1-4 family real estate from December 31, 2016 to December 31, 2017 primarily resulted from several loans that demonstrated payment performance in 2017 and thus were classified as performing at the end of 2017. 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. 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, 2017, the Company had one impaired loan totaling $1,729,000 which was on non accruing interest status. At December 31, 2016, the Company had one impaired loan of $2,988,000 which was 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, 2017 and December 31, 2016.
 


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, 2017
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Residential 1-4 family
$
2,314

 
2,322

 

 
742

 
103

Multifamily

 

 

 

 

Commercial real estate
893

 
889

 

 
902

 
39

Construction
1,185

 
1,182

 

 
1,354

 
64

Farmland

 

 

 
26

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment, and other

 

 

 

 

 
$
4,392

 
4,393

 

 
3,024

 
206

With allowance recorded:
 
 
 
 
 
 
 
Residential 1-4 family
$
409

 
581

 
136

 
461

 
29

Multifamily

 

 

 

 

Commercial real estate
2,157

 
2,157

 
291

 
2,894

 
17

Construction

 

 

 

 

Farmland

 

 

 

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment, and other

 

 

 

 

 
$
2,566

 
2,738

 
427

 
3,355

 
46

Total
 
Residential 1-4 family
$
2,723

 
2,903

 
136

 
1,203

 
132

Multifamily

 

 

 

 

Commercial real estate
3,050

 
3,046

 
291

 
3,796

 
56

Construction
1,185

 
1,182

 

 
1,354

 
64

Farmland

 

 

 
26

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
6,958

 
7,131

 
427

 
6,379

 
252




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

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

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


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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 fair value 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 increase in impaired loans during the year ended December 31, 2017 as compared to the year ended December 31, 2016 was the result of one large loan relationship becoming impaired in the fourth quarter of 2017, partially offset by the pay-down of two large impaired loan relationships. Overall, the Company’s market areas have seen continued strengthening in the residential real estate market in recent years while the commercial real estate market has remained steady. The allowance for loan losses related to collateral dependent impaired loans was measured based upon the estimated fair value of related collateral.
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 $16,199,000, inclusive of the Company’s non-performing loans, at December 31, 2017, as compared to $16,158,000 at December 31, 2016. Of the internally classified loans at December 31, 2017, $16,027,000 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 $172,000 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 67.8% and 71.1%, respectively, at December 31, 2017 and 2016.
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 three TDR relationships in the last half of 2017 and an existing TDR relationship previously classified as performing caused the nonperforming TDRs as of December 31, 2017 to increase $515,000 to $1,834,000 at December 31, 2017 when compared to December 31, 2016; however, overall TDR relationships decreased. Total TDRs decreased $512,000 to $4,084,000 from December 31, 2016 to December 31, 2017 due to the pay off of several 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, 2017, no single industry segment accounted for more than 10% of the Company’s portfolio other than construction and real estate loans.


The Company’s management believes there is an opportunity to increase the loan portfolio in 2018 as economic conditions in the Company's primary market areas continue to outperform comparable markets. The Company will target commercial business


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

lending, commercial and residential real estate lending and consumer lending as areas of emphasis in 2018. 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, 2017, the Company’s total loans equaled 85.9% 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 increased 4.58% to $365,196,000 at December 31, 2017 from $349,209,000 at December 31, 2016, and comprised the second largest and other primary component of the Company’s earning assets. Securities increased as the result of management’s decision to reinvest liquid funds in higher yielding assets. The average yield, excluding tax equivalent adjustment, of the securities portfolio at December 31, 2017 was 2.30% with a weighted average life of 6.17 years, as compared to an average yield of 2.14% and a weighted average life of 6.09 years at December 31, 2016. 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, 2017 and December 31, 2016 is as follows: 
 
December 31, 2017
 
December 31, 2017
(In Thousands)
Held-To-Maturity
 
Available-For-Sale
 
Amortized Cost
 
Estimated Market Value
 
Amortized Cost
 
Estimated Market Value
U.S. Government-sponsored enterprises (GSEs)*
$

 
$

 
$
74,690

 
$
72,980

Mortgage-backed:
 
 
 
 
 
 
 
GSEs residential
9,886

 
9,761

 
200,175

 
197,926

Asset-backed:
 
 
 
 
 
 
 
SBAP

 

 
26,387

 
25,598

Obligations of state and political
 
 
 
 
 
 
 
subdivisions
22,594

 
22,350

 
37,197

 
36,212

 
$
32,480

 
$
32,111

 
$
338,449

 
$
332,716

 
*
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, 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:
 
 
 
 
 
 
 
GSE residential
11,856

 
11,674

 
166,316

 
164,365

Asset-backed:
 
 
 
 
 
 
 
SBAP

 

 
37,577

 
36,857

Obligations of state and political
 
 
 
 
 
 
 
subdivisions
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
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, 2017:
 
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
$
3,316

 
$
21

 
4

 
$
5,206

 
$
135

 
5

 
$
8,522

 
$
156

Obligations of states and political subdivisions
10,137

 
46

 
27

 
7,278

 
264

 
18

 
17,415

 
310

 
$
13,453

 
$
67

 
31

 
$
12,484

 
$
399

 
23

 
$
25,937

 
$
466

Available-for-Sale Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSEs
$
16,099

 
$
190

 
8

 
$
55,726

 
$
1,524

 
21

 
$
71,825

 
$
1,714

Mortgage-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE residential
92,180

 
769

 
43

 
81,434

 
1,782

 
54

 
173,614

 
2,551

Asset-backed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SBAP
9,087

 
181

 
7

 
16,510

 
608

 
8

 
25,597

 
789

Obligations of states and political subdivisions
12,128

 
113

 
22

 
21,762

 
879

 
56

 
33,890

 
992

 
$
129,494

 
$
1,253

 
80

 
$
175,432

 
$
4,793

 
139

 
$
304,926

 
$
6,046



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, 2017, 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 2017 and 2016 were funded primarily by increases in deposits and the Company’s earnings before the adjustment for newly enacted tax rates. Total deposits, which are the principal source of funds for the Company, totaled $2,037,745,000 at December 31, 2017 compared to $1,942,135,000 at December 31, 2016. 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 $95,610,000, or 4.92%, growth in deposits in 2017 was due to a $20,285,000, or 3.23%, increase in money market accounts, a $41,443,000, or 9.12%, increase in NOW accounts, a $12,588,000, or 5.55%, increase in demand deposit accounts, a $12,800,000, or 10.34%, increase in savings accounts and a $12,413,000, or 2.92%, increase in certificates of deposits, offset by a decrease in individual retirement accounts of $3,919,000 or 4.73%. The average rate paid on average total interest-bearing deposits was 0.50% for 2017 and 2016. The average rate paid in 2015 was 0.56%. 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. It’s these same competitive pressures that may cause our deposit rates to rise more quickly than we are able to increase rates we earn on loans in a rising rate environment like the one we are currently experiencing. If this were to happen our net interest margin would experience compression and our results of operations would be negatively impacted. The ratio of average loans to average deposits was 86.5% in 2017, 84.0% in 2016, and 82.7% in 2015. The Company anticipates that during 2018 deposits will continue to shift to money market, NOW, or savings accounts due to the current rate environment notwithstanding the rate increases initiated by the Federal Reserve in 2017 that we believe will continue in 2018.
Contractual Obligations
The Company’s contractual obligations at December 31, 2017 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
276

 
551

 
232

 
75

 
1,134

Purchases

 

 

 

 

Other Long-Term Liabilities

 

 

 

 

Total
$
276

 
$
551

 
$
232

 
$
75

 
$
1,134



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, 2017, 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, 2017, the Company had unfunded lines of credit of $605 million and outstanding standby letters of credit of $69 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, 2017, the Company’s liquid assets totaled approximately $227.8 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, 2017, 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, 2017, securities totaling approximately $37.9 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, 2017, loans totaling approximately $544.9 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 $127.0 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 2018.
The following table shows the rate sensitivity gaps for different time periods as of December 31, 2017:
Interest Rate Sensitivity Gaps 
(In Thousands)
1-90 Days
 
91-180 Days
 
181-365 Days
 
One Year And Longer
 
Total
Interest-earning assets
$
279,267

 
108,980

 
247,092

 
1,533,602

 
2,168,941

Interest-bearing liabilities
(1,361,499
)
 
(71,159
)
 
(105,024
)
 
(261,368
)
 
(1,799,050
)
Interest-rate sensitivity gap
$
(1,082,232
)
 
37,821

 
142,068

 
1,272,234

 
369,891

Cumulative gap
$
(1,082,232
)
 
(1,044,411
)
 
(902,343
)
 
369,891

 
 

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. The EVE is a longer term view of interest rate risk because it measures the present value of the future cash flows. Presented below is the estimated impact on Wilson Bank’s net interest income and EVE as of December 31, 2017, assuming an immediate shift in interest rates:
 
 
% Change from Base Case for
Immediate Parallel Changes in Rates
 
-200 BP(1)
 
-100 BP(1)
 
+100 BP
 
+200 BP
 
+300 BP
Net interest income
(6.91
)%
 
(3.49
)%
 
(2.71
)%
 
(5.86
)%
 
(9.22
)%
EVE
(17.95
)
 
(7.12
)
 
(0.41
)
 
(2.07
)
 
(4.39
)
 
(1) Because certain current short-term interest rates are at or below 1.00% or 2.00%, the 100 basis points downward shock assumes that certain corresponding interest rates reflect a decrease of less than the full 100 or 200 basis points 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, 2017, total stockholders’ equity was $267,730,000, or 11.55% of total assets, which compares with $244,620,000, or 11.13% of total assets, at December 31, 2016, and $223,438,000, or 11.05% of total assets, at December 31, 2015. 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 2017 reflects (i) net income of $23,526,000 less cash dividends of $0.65 per share totaling $6,729,000, (ii) the issuance of 125,960 shares of common stock for $5,266,000, as reinvestment of cash dividends, (iii) the issuance of 5,078 shares of common stock pursuant to exercise of stock options for $152,000, (iv) the net unrealized gain on available-for-sale securities of $545,000, and (v) a stock based compensation expense of $350,000.
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, 2017 and December 31, 2016, the Company and the Bank are considered to be “well-capitalized” under applicable regulatory definitions.
As of December 31, 2017, 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 regulations as of December 31, 2017 and December 31, 2016, 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, 2017 and 2016, 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 Adequacy Requirements with Basel III Capital Conservation Buffer
 
Minimum To Be Well Capitalized Under Applicable Prompt Corrective Action Regulatory Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
291,395

 
14.2
%
 
$
189,658

 
9.250
%
 
$
205,036

 
10.0
%
Wilson Bank
289,824

 
14.1

 
189,618

 
9.250

 
204,992

 
10.0

Tier 1 capital to risk weighted assets:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
267,159

 
13.0

 
148,651

 
7.250

 
123,021

 
6.0

Wilson Bank
265,588

 
13.0

 
148,619

 
7.250

 
163,994

 
8.0

Common equity Tier 1 capital to risk weighted assets:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
267,159

 
13.0

 
117,895

 
5.750

 
N/A

 
N/A

Wilson Bank
265,588

 
13.0

 
117,871

 
5.750

 
133,245

 
6.5

Tier 1 capital to average assets:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
267,159

 
11.9

 
90,110

 
4.0

 
N/A

 
N/A

Wilson Bank
265,588

 
11.5

 
92,062

 
4.0

 
115,078

 
5.0

 


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 
Actual
 
Minimum Capital Adequacy Requirements with Basel III Capital Conservation Buffer
 
Minimum To Be Well Capitalized Under Applicable Prompt Corrective Action Regulatory Provisions
December 31, 2016
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital to risk weighted assets:
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
266,954

 
12.7
%
 
$
181,298

 
8.625
%
 
$
210,200

 
10.0
%
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

 
126,154

 
6.0

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

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, 2017.


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,
 
 
 
 
 
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
Fair
Value
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned interest:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate
$
29,209

 
38,532

 
12,765

 
31,773

 
10,287

 
1,130,228

 
1,252,794

 
1,252,794

Average interest rate
5.36
%
 
4.94
%
 
5.11
%
 
5.08
%
 
5.14
%
 
4.37
%
 
4.44
%
 
 
Fixed rate
$
228,440

 
84,876

 
41,302

 
23,582

 
23,497

 
104,050

 
505,747

 
503,431

Average interest rate
4.31
%
 
5.03
%
 
4.99
%
 
4.83
%
 
4.50
%
 
4.26
%
 
4.51
%
 
 
Securities
$
4,345

 
4,278

 
7,052

 
8,166

 
10,161

 
331,194

 
365,196

 
364,827

Average interest rate
1.89
%
 
2.49
%
 
2.09
%
 
1.76
%
 
2.04
%
 
2.33
%
 
2.30
%
 
 
Loans held for sale
$
5,106

 

 

 

 

 

 
5,106

 
5,106

Average interest rate
3.74
%
 

 

 

 

 

 
3.74
%
 
 
Interest-bearing deposits
$
1,536,817

 
102,230

 
76,186

 
47,816

 
21,769

 
13,368

 
1,798,186

 
1,604,008

Average interest rate
0.37
%
 
1.15
%
 
1.32
%
 
1.84
%
 
1.96
%
 
2.48
%
 
0.53
%
 
 
Securities sold under repurchase agreements
$
864

 

 

 

 

 

 
864

 
864

Average interest rate
1.47
%
 

 

 

 

 

 
1.47
%
 
 
Impact of Inflation
Although interest rates are significantly affected by inflation, for the fiscal years ended December 31, 2017, 2016, and 2015, the inflation rate is believed to have had an immaterial impact on the Company’s results of operations.
Impact of New Accounting Standards
Accounting Standards Update (“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


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date" which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We expect that ASU 2014-09 will require us to change how we recognize certain recurring revenue streams within investment management fees, insurance commissions and fees and other categories of non-interest income; however, we do not expect these changes to have a significant impact on our financial statements. We expect to adopt the standard in the first quarter of 2018.
In February 2016, FASB issued ASU 2016-02, "Leases (Topic 842)." The amendments in this ASU are effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. As a result of the amendment, lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustments, such as adjustments for initial direct costs. For income statement purposes, FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. We currently do not expect this ASU to have a material impact on our consolidated financial statements.
In June 2016, FASB  issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments."  ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on held-to-maturity debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements. We are also evaluating the sufficiency of current systems and data needed to comply with this ASU. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.
In August 2016, FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The update addresses eight specific cash flow issues including, but not limited to, proceeds from the settlement of bank-owned life insurance policies, with the objective of reducing the existing diversity in practice. ASU 2016-15 will be effective on January 1, 2018. We do not expect adoption of this standard to be significant to our financial statements.
In January 2017, FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for us on January 1, 2020, with early adoption permitted for interim or annual impairment tests beginning in 2017. ASU 2017-04 is not expected to have a significant impact on our financial statements.
In March 2017, FASB issued ASU 2017-08, “Receivables -  Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 provides guidance on the amortization period for certain purchased callable debt securities held at a premium. This update shortens the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument related


WILSON BANK HOLDING COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

to certain cash flow issues. ASU 2017-08 will be effective for us on January 1, 2019. We are currently evaluating the potential impact of ASU 2017-08 on our financial statements.

Other than those previously discussed, there were no other recently issued accounting pronouncements that may materially impact the Company.


Holding Company & Stock Information
Wilson Bank Holding Company Directors


James Anthony Patton, Chairman; Randall Clemons; Charles Bell; Jack Bell; James F. Comer; Robert H. Goodall, Jr; Jerry Franklin; John Freeman; William Jordan; John C. McDearman III 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 19, 2018 was 4,060. 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 common stock during the years 2016 and 2017. *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.
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. On January 1, 2017, a $.30 per share cash dividend was declared and on July 1, 2017, a $.35 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 and economic and regulatory considerations.
Stock Prices 
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

2017
High

 
Low

First Quarter
$
43.00

*
$
40.75

Second Quarter
$
42.75

 
$
41.75

Third Quarter
$
44.00

*
$
42.75

Fourth Quarter
$
100.00

*
$
43.75

*Represents one transaction of 50 shares during the second quarter of 2016, one transaction of 294 shares during the fourth quarter of 2016, one transaction of 2,400 shares during the first quarter of 2017, one transaction of 3,395 shares during the third quarter of 2017 and one transaction of 100 shares during the fourth quarter of 2017 of which the Company is aware where the sale prices was at least $1.25 higher than any other trade during the quarter of which the Company is aware. The volume weighted average stock price during the second quarter of 2016 was $39.28 and the volume weighted average stock price during the fourth quarter of 2016 was $40.62. The volume weighted average stock price during the first quarter of 2017 was $41.17 and the volume weighted average stock price during the third quarter of 2017 and fourth quarter of 2017 was $42.90 and $44.48, respectively.

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 24, 2018 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,
 
2017
 
2016
 
2015
 
2014
 
2013
CONSOLIDATED BALANCE SHEETS:
 
 
 
 
 
 
 
 
 
Total assets end of year
$
2,317,033

 
2,198,051

 
2,021,604

 
1,873,242

 
1,748,971

Loans, net
$
1,727,253

 
1,667,088

 
1,443,179

 
1,329,865

 
1,184,267

Securities
$
365,196

 
349,209

 
359,323

 
374,543

 
356,196

Deposits
$
2,037,745

 
1,942,135

 
1,789,850

 
1,660,270

 
1,554,255

Stockholders’ equity
$
267,730

 
244,620

 
223,438

 
200,892

 
177,671

 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
CONSOLIDATED STATEMENTS OF EARNINGS:
 
 
 
 
 
 
 
 
 
Interest income
$
91,020

 
84,746

 
78,839

 
74,380

 
71,814

Interest expense
8,889

 
8,284

 
8,608

 
9,768

 
10,879

Net interest income
82,131

 
76,462

 
70,231

 
64,612

 
60,935

Provision for loan losses
1,681

 
379

 
388

 
498

 
2,177

Net interest income after provision for loan losses
80,450

 
76,083

 
69,843

 
64,114

 
58,758

Non-interest income
22,836

 
21,728

 
19,941

 
16,678

 
15,204

Non-interest expense
60,406

 
57,337

 
52,159

 
47,705

 
48,787

Earnings before income taxes
42,880

 
40,474

 
37,625

 
33,087

 
25,175

Income taxes
19,354

 
14,841

 
13,762

 
12,310

 
9,306

Net earnings
$
23,526

 
25,633

 
23,863

 
20,777

 
15,869

Cash dividends declared
$
6,729

 
5,756

 
4,935

 
4,510

 
4,464

PER SHARE DATA: (1)
 
 
 
 
 
 
 
 
 
Basic earnings per common share
$
2.26

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