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EX-32.2 - EXHIBIT 32.2 - WILSON BANK HOLDING COwbhc03312018ex322.htm
EX-32.1 - EXHIBIT 32.1 - WILSON BANK HOLDING COwbhc03312018ex321.htm
EX-31.2 - EXHIBIT 31.2 - WILSON BANK HOLDING COwbhc03312018ex312.htm
EX-31.1 - EXHIBIT 31.1 - WILSON BANK HOLDING COwbhc03312018ex311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 0-20402
 

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





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock outstanding: 10,523,445 shares at May 9, 2018
 



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



Part I. Financial Information
Item 1. Financial Statements
WILSON BANK HOLDING COMPANY
Consolidated Balance Sheets
March 31, 2018 and December 31, 2017

 
(Unaudited)
 
(Audited)
 
March 31,
2018
 
December 31,
2017
 
(Dollars in Thousands
Except Share Amounts)
Assets
 
 
 
Loans
$
1,827,729

 
$
1,751,162

Less: Allowance for loan losses
(24,846
)
 
(23,909
)
Net loans
1,802,883

 
1,727,253

Securities:
 
 
 
Held to maturity, at cost (market value $30,602 and $32,111, respectively)
31,490

 
32,480

Available-for-sale, at market (amortized cost $336,766 and $338,449, respectively)
324,580

 
332,716

Total securities
356,070

 
365,196

Loans held for sale
5,750

 
5,106

Interest bearing deposits
52,092

 
44,465

Restricted equity securities
3,012

 
3,012

Federal funds sold
15,000

 

Total earning assets
2,234,807

 
2,145,032

Cash and due from banks
40,342

 
51,053

Bank premises and equipment, net
57,229

 
54,215

Accrued interest receivable
6,303

 
6,266

Deferred income tax asset
9,185

 
7,424

Other real estate
1,620

 
1,635

Bank owned life insurance
29,689

 
29,475

Other assets
16,921

 
17,128

Goodwill
4,805

 
4,805

Total assets
$
2,400,901

 
$
2,317,033

Liabilities and Stockholders’ Equity
 
 
 
Deposits
$
2,115,234

 
$
2,037,745

Securities sold under repurchase agreements

 
864

Accrued interest and other liabilities
15,644

 
10,694

Total liabilities
2,130,878

 
2,049,303

Stockholders’ equity:
 
 
 
Common stock, $2.00 par value; authorized 50,000,000 shares, issued and outstanding 10,522,277 and 10,450,711 shares, respectively
21,045

 
20,901

Additional paid-in capital
69,140

 
66,047

Retained earnings
188,839

 
185,017

Net unrealized losses on available-for-sale securities, net of income taxes of $3,185 and $1,498, respectively
(9,001
)
 
(4,235
)
Total stockholders’ equity
270,023

 
267,730

Total liabilities and stockholders’ equity
$
2,400,901

 
$
2,317,033


See accompanying notes to consolidated financial statements (unaudited)

4



WILSON BANK HOLDING COMPANY
Consolidated Statements of Earnings
Three Months Ended March 31, 2018 and 2017
(Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars in Thousands Except Per Share Amounts)
Interest income:
 
 
 
Interest and fees on loans
$
21,833

 
$
19,945

Interest and dividends on securities:
 
 
 
Taxable securities
1,666

 
1,283

Exempt from Federal income taxes
303

 
337

Interest on loans held for sale
39

 
66

Interest on Federal funds sold
154

 
71

Interest on balances held at depository institutions
67

 
25

Interest and dividends on restricted securities
32

 
31

Total interest income
24,094

 
21,758

Interest expense:
 
 
 
Interest on negotiable order of withdrawal accounts
344

 
319

Interest on money market and savings accounts
707

 
446

Interest on time deposits
1,592

 
1,250

Interest on federal funds purchased

 
8

Interest on securities sold under repurchase agreements
16

 
1

Total interest expense
2,659

 
2,024

Net interest income before provision for loan losses
21,435

 
19,734

Provision for loan losses
1,023

 
389

Net interest income after provision for loan losses
20,412

 
19,345

Non-interest income:
 
 
 
Service charges on deposit accounts
1,542

 
1,429

Other fees and commissions
3,003

 
2,641

Income on BOLI and annuity contracts
214

 
222

Gain on sale of loans
1,031

 
976

Gain (loss) on sale of other real estate

 
24

Gain (loss) on sale of securities

 
(38
)
Total non-interest income
5,790

 
5,254

Non-interest expense:
 
 
 
Salaries and employee benefits
9,823

 
8,847

Occupancy expenses, net
963

 
851

Advertising & public relations expense
482

 
399

Furniture and equipment expense
585

 
520

Data processing expense
710

 
646

ATM & interchange expense
684

 
580

Directors’ fees
149

 
162

Other operating expenses
2,653

 
2,232

Total non-interest expense
16,049

 
14,237

Earnings before income taxes
10,153

 
10,362

Income taxes
2,673

 
3,867

Net earnings
$
7,480

 
$
6,495

Weighted average number of common shares outstanding-basic
10,507,273

 
10,360,776

Weighted average number of common shares outstanding-diluted
10,513,076

 
10,365,717

Basic earnings per common share
$
0.71

 
$
0.63

Diluted earnings per common share
$
0.71

 
$
0.63

Dividends per share
$
0.35

 
$
0.30

See accompanying notes to consolidated financial statements (unaudited)

5



WILSON BANK HOLDING COMPANY
Consolidated Statements of Comprehensive Earnings
Three Months Ended March 31, 2018 and 2017
(Unaudited)
 
 
Three Months Ended
March 31,
 
2018
 
2017
 
(In Thousands)
Net earnings
$
7,480

 
$
6,495

Other comprehensive earnings (loss), net of tax:
 
 
 
Unrealized gains (losses) on available-for-sale securities arising during period, net of taxes of $1,687 and $57, respectively
(4,766
)
 
(89
)
Reclassification adjustment for net losses (gains) included in net earnings, net of taxes of $0 and $15, respectively

 
23

Other comprehensive earnings (loss)
(4,766
)
 
(66
)
Comprehensive earnings
$
2,714

 
$
6,429


See accompanying notes to consolidated financial statements (unaudited)


6



WILSON BANK HOLDING COMPANY
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2018 and 2017
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited) 
 
Three Months Ended March 31,
 
2018
 
2017
 
(In Thousands)
Cash flows from operating activities:
 
 
 
Interest received
$
24,710

 
$
23,059

Fees and commissions received
4,545

 
4,070

Proceeds from sale of loans held for sale
28,865

 
31,920

Origination of loans held for sale
(28,478
)
 
(24,449
)
Interest paid
(2,562
)
 
(2,157
)
Cash paid to suppliers and employees
(11,926
)
 
(10,955
)
Income taxes paid
(974
)
 
(792
)
Net cash provided by operating activities
14,180

 
20,696

Cash flows from investing activities:
 
 
 
Proceeds from maturities, calls, and principal payments of held-to-maturity securities
928

 
1,046

Proceeds from maturities, calls, and principal payments of available-for-sale securities
10,210

 
9,556

Proceeds from the sale of available-for-sale securities

 
12,446

Purchase of available-for-sale securities
(9,118
)
 
(12,563
)
Loans made to customers, net of repayments
(76,653
)
 
(48,327
)
Purchase of premises and equipment
(3,750
)
 
(2,727
)
Proceeds from sale of other real estate
15

 
2,053

Net cash used in investing activities
(78,368
)
 
(38,516
)
Cash flows from financing activities:
 
 
 
Net increase in non-interest bearing, savings and NOW deposit accounts
52,874

 
68,610

Net increase in time deposits
24,615

 
14,126

Net increase (decrease) in securities sold under repurchase agreements
(864
)
 
773

Dividends paid
(3,658
)
 
(3,096
)
Proceeds from sale of common stock pursuant to dividend reinvestment
2,902

 
2,398

Proceeds from exercise of stock options
235

 
93

Net cash provided by financing activities
76,104

 
82,904

Net increase (decrease) in cash and cash equivalents
11,916

 
65,084

Cash and cash equivalents at beginning of period
95,518

 
47,918

Cash and cash equivalents at end of period
$
107,434

 
$
113,002

 
See accompanying notes to consolidated financial statements (unaudited)











7



WILSON BANK HOLDING COMPANY
Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31, 2018 and 2017
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited) 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(In Thousands)
Reconciliation of net earnings to net cash provided by operating activities:
 
 
 
 
Net earnings
 
7,480

 
6,495

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization, and accretion
 
1,389

 
1,421

Provision for loan losses
 
1,023

 
389

Gain on sale of other real estate
 

 
(24
)
Loss on sale of securities
 

 
38

Stock-based compensation expense
 
100

 
79

Decrease (increase) in loans held for sale
 
(644
)
 
6,495

Increase in deferred tax asset
 
(74
)
 
(131
)
Decrease (increase) in other assets, bank owned life insurance and annuity contract earnings, net
 
(7
)
 
178

Decrease (increase) in interest receivable
 
(37
)
 
592

Increase in other liabilities
 
3,080

 
2,091

Increase in taxes payable
 
1,773

 
3,206

Increase (decrease) in interest payable
 
97

 
(133
)
Total adjustments
 
6,700

 
14,201

                         Net cash provided by operating activities
 
$
14,180


$
20,696

 
 
 
 
 
Supplemental schedule of non-cash activities:
 
 
 
 
Unrealized gain (loss) in value of securities available-for-sale, net of taxes of $1,687 and $42 for the three months ended March 31, 2018 and 2017, respectively
 
$
(4,766
)
 
$
(66
)
Non-cash transfers from loans to other real estate
 
$

 
$
80

Non-cash transfers from other real estate to loans
 
$

 
$
16

Non-cash transfers from loans to other assets
 
$

 
$
2

See accompanying notes to consolidated financial statements (unaudited)

8



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

Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
These consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, the valuation of deferred tax assets, determination of any impairment of intangibles, other-than-temporary impairment of securities, the valuation of other real estate, and the fair value of financial instruments. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. There have been no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for loan losses and any deferred fees or costs on originated loans. Interest income on loans is accrued based on the principal balance outstanding. Loan origination fees, net of certain loan origination costs, are deferred and recognized as an adjustment to the related loan yield using a method which approximates the interest method.
Loans are charged off when management believes that the full collectability of the loan is unlikely. As such, a loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely.
Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which often is determined when the principal or interest on the loan is more than 90 days past due, unless the loan is both well-secured and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status, is reversed against current income. Interest income is subsequently recognized only to the extent cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis. A nonaccrual loan is returned to accruing status once the loan has been brought current and collection is reasonably assured or the loan has been “well-secured” through other techniques. Past due status is determined based on the contractual due date per the underlying loan agreement.

All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans. At December 31, 2017 and March 31, 2018, there were no loans classified as nonaccrual that were not also deemed to be impaired except for those loans not individually evaluated for impairment as described below. A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan. This determination is made using a variety of techniques, which include a review of the borrower’s financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of

9



reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc). Loans with an identified weakness and principal balance of $500,000 or more are subject to individual identification for impairment. Individually identified impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a specific valuation allowance is established as a component of the allowance for loan losses or, in the case of collateral dependent loans, the excess may be charged off. Changes to the valuation allowance are recorded as a component of the provision for loan losses. Any subsequent adjustments to present value calculations for impaired loan valuations as a result of the passage of time, such as changes in the anticipated payback period for repayment, are recorded as a component of the provision for loan losses. For loans less than $500,000, the Company assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for non-impaired loans of a similar type.
Allowance for Loan Losses — The allowance for loan losses is maintained at a level that management believes to be adequate to absorb probable losses in the loan portfolio. Loan losses are charged against the allowance when they are known. Subsequent recoveries are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, volume, growth, composition of the loan portfolio, homogeneous pools of loans, risk ratings of specific loans, historical loan loss factors, loss experience of various loan segments, identified impaired loans and other factors related to the portfolio. This evaluation is performed quarterly and is inherently subjective, as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on any impaired loans.
In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, independent loan reviewers, and reviews that may have been conducted by third-party reviewers. We incorporate relevant loan review results in the loan impairment determination. In addition, regulatory agencies, as an integral part of their examination process, will periodically review the Company’s allowance for loan losses, and may require the Company to record adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

Recently Issued Accounting Pronouncements    

In 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 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

10



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 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.

In February 2018, FASB Issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220).”  On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act).  The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users.  The Company elected to adopt this update as of December 31, 2017 and as a result reclassified $697,000 from retained earnings to accumulated other comprehensive income.

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

Subsequent Events  - Accounting Standards Codification (ASC) Topic 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  Wilson Bank Holding Company evaluated all events or transactions that occurred after March 31, 2018 through the date of the issued financial statements.

Note 2. Loans and Allowance for Loan Losses
For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).
The following schedule details the loans of the Company at March 31, 2018 and December 31, 2017:

11



 
(In Thousands)
 
March 31,
2018
 
December 31,
2017
Mortgage loans on real estate
 
 
 
       Residential 1-4 family
$
412,919

 
$
406,667

Multifamily
92,322

 
91,992

Commercial
691,320

 
661,223

Construction and land development
429,689

 
392,039

Farmland
30,065

 
34,212

Second mortgages
9,077

 
8,952

Equity lines of credit
65,404

 
60,650

Total mortgage loans on real estate
1,730,796

 
1,655,735

Commercial loans
50,797

 
47,939

Agricultural loans
1,833

 
1,665

Consumer installment loans
 
 
 
Personal
38,554

 
39,624

Credit cards
3,463

 
3,385

Total consumer installment loans
42,017

 
43,009

Other loans
9,732

 
10,193

                                Total loans before net deferred loan fees
1,835,175

 
1,758,541

Net deferred loan fees
(7,446
)
 
(7,379
)
Total loans
1,827,729

 
1,751,162

Less: Allowance for loan losses
(24,846
)
 
(23,909
)
Net loans
$
1,802,883

 
$
1,727,253


Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

12



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

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

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

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

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

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

13



Transactions in the allowance for loan losses for the three months ended March 31, 2018 and year ended December 31, 2017 are summarized as follows:

 
(In Thousands)
 
Residential
1-4 Family
 
Multifamily
 
Commercial
Real Estate
 
Construction
 
Farmland
 
Second
Mortgages
 
Equity Lines
of Credit
 
Commercial
 
Agricultural, Installment and Other
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,156

 
1,011

 
9,267

 
6,094

 
487

 
94

 
723

 
401

 
676

 
23,909

Provision
555

 
5

 
111

 
200

 
(59
)
 
2

 
45

 
25

 
139

 
1,023

Charge-offs

 

 

 
(2
)
 

 

 

 

 
(235
)
 
(237
)
Recoveries
6

 

 

 
22

 

 

 

 
2

 
121

 
151

Ending balance
$
5,717

 
1,016

 
9,378

 
6,314

 
428

 
96

 
768

 
428

 
701

 
24,846

Ending balance individually evaluated for impairment
$
946

 

 
328

 

 

 

 

 

 

 
1,274

Ending balance collectively evaluated for impairment
$
4,771

 
1,016

 
9,050

 
6,314

 
428

 
96

 
768

 
428

 
701

 
23,572

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
412,919

 
92,322

 
691,320

 
429,689

 
30,065

 
9,077

 
65,404

 
50,797

 
53,582

 
1,835,175

Ending balance individually evaluated for impairment
$
4,136

 

 
2,487

 
903

 
310

 

 

 

 

 
7,836

Ending balance collectively evaluated for impairment
$
408,783

 
92,322

 
688,833

 
428,786

 
29,755

 
9,077

 
65,404

 
50,797

 
53,582

 
1,827,339

 
Residential
1-4 Family
 
Multifamily
 
Commercial
Real Estate
 
Construction
 
Farmland
 
Second
Mortgages
 
Equity Lines
of Credit
 
Commercial
 
Agricultural, Installment and Other
 
Total
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,571

 
839

 
9,541

 
5,387

 
658

 
112

 
675

 
386

 
562

 
22,731

Provision
675

 
172

 
(414
)
 
586

 
(168
)
 
(10
)
 
45

 
9

 
786

 
1,681

Charge-offs
(118
)
 

 

 

 
(3
)
 
(11
)
 

 

 
(1,090
)
 
(1,222
)
Recoveries
28

 

 
140

 
121

 

 
3

 
3

 
6

 
418

 
719

Ending balance
$
5,156

 
1,011

 
9,267

 
6,094

 
487

 
94

 
723

 
401

 
676

 
23,909

Ending balance individually evaluated for impairment
$
136

 

 
291

 

 

 

 

 

 

 
427

Ending balance collectively evaluated for impairment
$
5,020

 
1,011

 
8,976

 
6,094

 
487

 
94

 
723

 
401

 
676

 
23,482

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
406,667

 
91,992

 
661,223

 
392,039

 
34,212

 
8,952

 
60,650

 
47,939

 
54,867

 
1,758,541

Ending balance individually evaluated for impairment
$
2,678

 

 
3,046

 
1,182

 

 

 

 

 

 
6,906

Ending balance collectively evaluated for impairment
$
403,989

 
91,992

 
658,177

 
390,857

 
34,212

 
8,952

 
60,650

 
47,939

 
54,867

 
1,751,635


14




Impaired Loans
At March 31, 2018, the Company had certain impaired loans of $2.1 million which were on non-accruing interest status. At December 31, 2017, the Company had certain impaired loans of $1.7 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The following table presents the Company’s impaired loans at March 31, 2018 and December 31, 2017. 
 
In Thousands
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
March 31, 2018
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
2,284

 
2,321

 

 
2,299

 
35

Multifamily

 

 

 

 

Commercial real estate
324

 
323

 

 
609

 
4

Construction
906

 
903

 

 
1,046

 
13

Farmland
310

 
310

 

 
155

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
3,824

 
3,857

 

 
4,109

 
52

With allowance recorded:
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
1,870

 
2,041

 
946

 
1,140

 
14

Multifamily

 

 

 

 

Commercial real estate
2,165

 
2,164

 
328

 
2,161

 
4

Construction

 

 

 

 

Farmland

 

 

 

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
4,035

 
4,205

 
1,274

 
3,301

 
18

Total
 
 
 
 
 
 
 
 
 
Residential 1-4 family
$
4,154

 
4,362

 
946

 
3,439

 
49

Multifamily

 

 

 

 

Commercial real estate
2,489

 
2,487

 
328

 
2,770

 
8

Construction
906

 
903

 

 
1,046

 
13

Farmland
310

 
310

 

 
155

 

Second mortgages

 

 

 

 

Equity lines of credit

 

 

 

 

Commercial

 

 

 

 

Agricultural, installment and other

 

 

 

 

 
$
7,859

 
8,062

 
1,274

 
7,410

 
70


15



 
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

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

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

16



The following table summarizes the carrying balances of TDRs at March 31, 2018 and December 31, 2017. 
 
March 31, 2018
 
December 31, 2017
 
(In thousands)
Performing TDRs
$
1,710

 
$
2,250

Nonperforming TDRs
1,261

 
1,834

Total TDRS
$
2,971

 
$
4,084


The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the three months ended March 31, 2018 and the year ended December 31, 2017 (in thousands, except for number of contracts): 
 
March 31, 2018
 
December 31, 2017
 
Number
of
Contracts
 
Pre
Modification
Outstanding
Recorded
Investment
 
Post
Modification
Outstanding
Recorded
Investment,
Net of Related
Allowance
 
Number
of
Contracts
 
Pre
Modification
Outstanding
Recorded
Investment
 
Post
Modification
Outstanding
Recorded
Investment,
Net of Related
Allowance
Residential 1-4 family

 
$

 
$

 
6

 
$
610

 
$
535

Multifamily

 

 

 

 

 

Commercial real estate

 

 

 

 

 

Construction

 

 

 

 

 

Farmland
1

 
310

 
310

 
1

 
86

 
86

Second mortgages

 

 

 

 

 

Equity lines of credit

 

 

 

 

 

Commercial

 

 

 

 

 

Agricultural, installment and other

 

 

 
1

 
3

 
3

Total
1

 
$
310

 
$
310

 
8

 
$
699

 
$
624

    
As of March 31, 2018 the Company had two loan relationships totaling $413,000 that had been previously classified as a TDR subsequently default within twelve months of restructuring. As of December 31, 2017, the Company had one loan relationship totaling $103,000 that had been previously classified as a TDR subsequently default within twelve months of restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract.

As of March 31, 2018 and December 31, 2017, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $341,000 and $201,000, respectively.
Potential problem loans, which include nonperforming loans, amounted to approximately $16.7 million at March 31, 2018 and $16.2 million at December 31, 2017. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.
The following summary presents the Bank's loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:
 
Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize

17



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

18



The following table is a summary of the Bank’s loan portfolio by risk rating at March 31, 2018 and December 31, 2017: 
 
(In Thousands)
 
Residential
1-4 Family
 
Multifamily
 
Commercial
Real Estate
 
Construction
 
Farmland
 
Second
Mortgages
 
Equity
Lines
of Credit
 
Commercial
 
Agricultural, installment and other
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by Internally Assigned Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
400,952

 
92,322

 
688,446

 
429,208

 
29,379

 
8,688

 
65,257

 
50,797

 
53,419

 
1,818,468

Special Mention
5,273

 

 
640

 
80

 
122

 
248

 

 

 
78

 
6,441

Substandard
6,694

 

 
2,234

 
401

 
564

 
141

 
147

 

 
85

 
10,266

Doubtful

 

 

 

 

 

 

 

 

 

Total
$
412,919

 
92,322

 
691,320

 
429,689

 
30,065

 
9,077

 
65,404

 
50,797

 
53,582

 
1,835,175

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Risk Profile by Internally Assigned Rating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
395,664

 
91,992

 
657,456

 
391,778

 
33,500

 
8,765

 
60,553

 
47,937

 
54,697

 
1,742,342

Special Mention
5,677

 

 
646

 
84

 
125

 
43

 
41

 
2

 
77

 
6,695

Substandard
5,326

 

 
3,121

 
177

 
587

 
144

 
56

 

 
93

 
9,504

Doubtful

 

 

 

 

 

 

 

 

 

Total
$
406,667

 
91,992

 
661,223

 
392,039

 
34,212

 
8,952

 
60,650

 
47,939

 
54,867

 
1,758,541



19



Note 3. Debt and Equity Securities
Debt and equity securities have been classified in the consolidated balance sheet according to management’s intent. Debt and equity securities at March 31, 2018 and December 31, 2017 are summarized as follows:
 
 
March 31, 2018
 
Securities Available-For-Sale
 
In Thousands
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
U.S. Government-sponsored enterprises (GSEs)*
$
74,692

 
$

 
$
3,576

 
$
71,116

Mortgage-backed:
 
 
 
 
 
 
 
GSE residential
196,569

 
341

 
5,985

 
190,925

Asset-backed:
 
 
 
 
 
 
 
SBAP
25,261

 
10

 
1,149

 
24,122

Obligations of states and political subdivisions
40,244

 

 
1,827

 
38,417

 
$
336,766

 
$
351

 
$
12,537

 
$
324,580


 
March 31, 2018
 
Securities Held-to-Maturity
 
In Thousands
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
Mortgage-backed:
 
 
 
 
 
 
 
Government-sponsored enterprises (GSEs)* residential
$
9,532

 
$
12

 
$
374

 
$
9,170

Obligations of states and political subdivisions
21,958

 
42

 
568

 
21,432

 
$
31,490

 
$
54

 
$
942

 
$
30,602


 
December 31, 2017
 
Securities Available-For-Sale
 
In Thousands
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
U.S. Government-sponsored enterprises (GSEs)*
$
74,690

 
$
4

 
$
1,714

 
$
72,980

Mortgage-backed:
 
 
 
 
 
 
 
GSE residential
200,175

 
302

 
2,551

 
197,926

Asset-backed:
 
 
 
 
 
 
 
SBAP
26,387

 

 
789

 
25,598

Obligations of states and political subdivisions
37,197

 
7

 
992

 
36,212

 
$
338,449

 
$
313

 
$
6,046

 
$
332,716


20



 
December 31, 2017
 
Securities Held-To-Maturity
 
In Thousands
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
Mortgage-backed:
 
 
 
 
 
 
 
Government-sponsored enterprises (GSEs)* residential