PINX:WBHC Wilson Bank Holding Company Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

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 June 30, 2012

or

 

¨ 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  ¨

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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    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: 7,386,156 shares at August 8, 2012.

 

 

 


Table of Contents

Part I:

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements      3   

The unaudited consolidated financial statements of the Company and its subsidiary are as follows:

  
  Consolidated Balance Sheets — June 30, 2012 and December 31, 2011      3   
  Consolidated Statements of Earnings — For the three months and six months ended June 30, 2012 and 2011      4   
 

Consolidated Statements of Comprehensive Earnings — For the three months and six months ended June 30, 2012 and 2011

     5   
  Consolidated Statements of Cash Flows — For the six months ended June 30, 2012 and 2011      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      42   
 

Disclosures required by Item 3 are incorporated by reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

Item 4.

  Controls and Procedures      43   

Part II:

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      43   

Item 1A.

  Risk Factors      43   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      43   

Item 3.

  Defaults Upon Senior Securities      43   

Item 4.

  Mine Safety Disclosures      43   

Item 5.

  Other Information      43   

Item 6.

  Exhibits      44   

Signatures

     45   
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

  

 

2


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

WILSON BANK HOLDING COMPANY

Consolidated Balance Sheets

June 30, 2012 and December 31, 2011

(Unaudited)

 

     June 30,
2012
    December 31,
2011
 
     (Dollars in Thousands)  
Assets     

Loans

   $ 1,134,235      $ 1,123,258   

Less: Allowance for loan losses

     (25,267     (24,525
  

 

 

   

 

 

 

Net loans

     1,108,968        1,098,733   
  

 

 

   

 

 

 

Securities:

    

Held to maturity, at cost (market value $16,187 and $15,266, respectively)

     15,410        14,464   

Available-for-sale, at market (amortized cost $343,462 and $309,329, respectively)

     345,733        310,731   
  

 

 

   

 

 

 

Total securities

     361,143        325,195   
  

 

 

   

 

 

 

Loans held for sale

     6,412        14,775   

Federal funds sold

     19,365        13,215   

Restricted equity securities

     3,012        3,012   
  

 

 

   

 

 

 

Total earning assets

     1,498,900        1,454,930   

Cash and due from banks

     50,038        40,959   

Bank premises and equipment, net

     35,449        35,437   

Accrued interest receivable

     5,604        5,930   

Deferred income tax asset

     8,205        8,488   

Other real estate

     18,256        19,117   

Other assets

     8,034        7,592   

Goodwill

     4,805        4,805   

Other intangible assets, net

     —          112   
  

 

 

   

 

 

 

Total assets

   $ 1,629,291      $ 1,577,370   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Deposits

   $ 1,450,773      $ 1,406,042   

Securities sold under repurchase agreements

     8,374        7,419   

Accrued interest and other liabilities

     6,739        6,561   
  

 

 

   

 

 

 

Total liabilities

     1,465,886        1,420,022   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock, $2.00 par value; authorized 15,000,000 shares, issued 7,348,693 and 7,304,186 shares, respectively

     14,697        14,608   

Additional paid-in capital

     48,383        46,734   

Retained earnings

     98,924        95,141   

Net unrealized losses on available-for-sale securities, net of income taxes of $870 and $537, respectively

     1,401        865   
  

 

 

   

 

 

 

Total shareholders’ equity

     163,405        157,348   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,629,291      $ 1,577,370   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

3


Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Earnings

Three Months and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012      2011  
    

(Dollars in Thousands

Except Per Share Amounts)

 

Interest income:

          

Interest and fees on loans

   $ 16,479       $ 16,585      $ 32,752       $ 32,824   

Interest and dividends on securities:

          

Taxable securities

     1,428         1,385        2,786         2,846   

Exempt from Federal income taxes

     101         104        202         214   

Interest on loans held for sale

     93         51        191         105   

Interest on Federal funds sold

     30         27        63         42   

Interest and dividends on restricted securities

     35         29        77         65   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     18,166         18,181        36,071         36,096   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Interest on negotiable order of withdrawal accounts

     508         556        1,014         1,107   

Interest on money market and savings accounts

     699         736        1,456         1,426   

Interest on certificates of deposit

     2,354         3,151        5,024         6,593   

Interest on securities sold under repurchase agreements

     14         13        28         27   

Interest on Federal funds purchased

     1         —          2         2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     3,576         4,456        7,524         9,155   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income before provision for loan losses

     14,590         13,725        28,547         26,941   

Provision for loan losses

     2,210         2,618        4,466         4,587   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     12,380         11,107        24,081         22,354   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest income:

          

Service charges on deposit accounts

     1,156         1,330        2,366         2,618   

Other fees and commissions

     1,970         1,811        3,803         3,451   

Gain on sale of loans

     813         418        1,434         718   

Gain (loss) on sale of other assets

     3         (1     6         (6

Gain on sale of securities

     236         —          259         —     

Other income

     3         —          3         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     4,181         3,558        7,871         6,781   

Non-interest expense:

          

Salaries and employee benefits

     5,995         5,649        11,844         10,981   

Occupancy expenses, net

     644         619        1,269         1,191   

Furniture and equipment expense

     258         281        531         528   

Data processing expense

     405         369        714         683   

Directors’ fees

     171         173        373         373   

Other operating expenses

     3,164         2,842        5,884         6,066   

Loss on sale of other real estate

     802         449        1,584         1,000   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expense

     11,439         10,382        22,199         20,822   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings before income taxes

     5,122         4,283        9,753         8,313   

Income taxes

     1,973         1,668        3,779         3,222   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings

   $ 3,149         2,615        5,974         5,091   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average number of shares outstanding-basic

     7,347,346         7,268,537        7,339,430         7,263,342   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average number of shares outstanding-diluted

     7,352,911         7,276,085        7,344,193         7,270,286   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per common share

   $ .43       $ .36      $ .81       $ .70   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per common share

   $ .43       $ .36      $ .81       $ .70   
  

 

 

    

 

 

   

 

 

    

 

 

 

Dividends per share

   $ —         $ —        $ .30       $ .30   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Comprehensive Earnings

Three Months and Six Months Ended June 30, 2012 and 2012

(Unaudited)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  
     (In Thousands)  

Net earnings

   $ 3,149      $ 2,615       $ 5,974      $ 5,091   
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive earnings, net of tax:

         

Unrealized gains on available-for-sale securities arising during period, net of taxes of $558, $990, $432 and $1,866, respectively

     897        1,596         696        3,009   

Reclassification adjustment for net gains included in net earnings, net of taxes of $90, $0, $99, and $0, respectively

     (146     —           (160     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive earnings

     751        1,596         536        3,009   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive earnings

   $ 3,900      $ 4,211       $ 6,510      $ 8,100   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

5


Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

     2012     2011  
     (In Thousands)  

Cash flows from operating activities:

    

Interest received

   $ 38,011      $ 37,228   

Fees and commissions received

     6,169        6,069   

Proceeds from sale of loans held for sale

     61,424        40,071   

Other income

     3        —     

Origination of loans held for sale

     (51,627     (37,915

Interest paid

     (8,491     (10,285

Cash paid to suppliers and employees

     (17,785     (15,672

Income taxes paid

     (5,111     (3,348
  

 

 

   

 

 

 

Net cash provided by operating activities

     22,593        16,148   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities, calls, and principal payments of held-to- maturity securities

     730        1,515   

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

     112,591        74,866   

Purchase of held-to-maturity securities

     (1,728     (2,891

Purchase of available-for-sale securities

     (148,027     (38,616

Loans made to customers, net of repayments

     (20,590     (33,400

Purchase of premises and equipment

     (728     (1,661

Proceeds from sale of other real estate

     5,144        2,785   

Proceeds from sale of other assets

     25        52   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (52,583     2,650   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in non-interest bearing, savings and NOW deposit accounts

     69,833        1,186   

Net increase (decrease) in time deposits

     (25,102     6,799   

Increase (decrease) in securities sold under repurchase agreements

     955        (234

Dividends paid

     (2,191     (2,168

Proceeds from sale of common stock pursuant to dividend reinvestment

     1,599        1,626   

Proceeds from exercise of stock options

     125        71   

Repurchase of common stock

     —          (94
  

 

 

   

 

 

 

Net cash provided by financing activities

     45,219        7,186   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     15,229        25,984   
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     54,174        38,282   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 69,403      $ 64,266   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

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Table of Contents

WILSON BANK HOLDING COMPANY

Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

     2012     2011  
     (In Thousands)  

Reconciliation of net earnings to net cash provided by operating activities:

    

Net earnings

   $ 5,974      $ 5,091   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation, amortization, and accretion

     2,442        1,769   

Provision for loan losses

     4,466        4,587   

Stock option compensation

     14        12   

Loss on sale of other real estate

     1,584        1,000   

Gain (loss) on sale of other assets

     (6     6   

Security gains

     (259     —     

Decrease in loans held for sale

     8,363        1,438   

Decrease in interest receivable

     326        245   

Increase in deferred tax assets

     (220     (48

Decrease (increase) in other assets, net

     (439     315   

Decrease in taxes payable

     (1,112     (78

Increase in other liabilities

     2,427        2,941   

Decrease in interest payable

     (967     (1,130
  

 

 

   

 

 

 

Total adjustments

     16,619        11,057   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 22,593      $ 16,148   
  

 

 

   

 

 

 

Supplemental schedule of non-cash activities:

    

Unrealized gain in values of securities available-for-sale, net of taxes of $333 and $1,866, for the six months ended June 30, 2012 and 2011, respectively

   $ 536      $ 3,009   
  

 

 

   

 

 

 

Non-cash transfers from loans to other real estate

   $ 6,085      $ 8,191   
  

 

 

   

 

 

 

Non-cash transfers from other real estate to loans

   $ 218      $ 3,972   
  

 

 

   

 

 

 

Non-cash transfers from loans to other assets

   $ 22      $ 47   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

7


Table of Contents

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, 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 financial statements and related notes appearing in the 2011 Annual Report previously filed on Form 10-K.

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Significant intercompany transactions and accounts are eliminated in consolidation.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, the valuation of deferred tax assets, determination of any impairment of intangibles, other-than-temporary impairment of securities, the valuation of other real estate, and the fair value of financial instruments. These financial statements should be read in conjunction with Wilson Bank Holding Company’s Annual Report on Form 10-K for the year ended December 31, 2011. There have been no significant changes to Wilson Bank Holding Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 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.

 

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Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

All loans that are placed on nonaccrual are further analyzed to determine if they should be classified as impaired loans. At December 31, 2011 and at June 30, 2012, there were no loans classified as nonaccrual that were not also deemed to be impaired. A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan. This determination is made using a variety of techniques, which include a review of the borrower’s financial condition, debt-service coverage ratios, global cash flow analysis, guarantor support, other loan file information, meetings with borrowers, inspection or reappraisal of collateral and/or consultation with legal counsel as well as results of reviews of other similar industry credits (e.g. builder loans, development loans, church loans, etc). Generally, loans with an identified weakness and principal balance of $100,000 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. 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 $100,000, the Company assigns a valuation allowance to these loans utilizing an allocation rate equal to the allocation rate calculated for loans of a similar type greater than $100,000.

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 Adopted Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)-Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 was effective for the Company in the first quarter of fiscal 2012 and will be applied prospectively. This adoption did not have an impact on the Company’s financial position or results of operations.

 

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Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income, new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity and requires presentation of reclassification adjustments on the face of the income statement. This adoption did not have any impact on the Company’s financial position or results of operations.

In September 2011, the FASB issued ASU No. 2011-8, Intangibles-Goodwill and Other, regarding testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). Based on the qualitative assessment, if an entity determines that the fair value of a reporting unit is more than its carrying amount, the two-step goodwill impairment test is not required. The new guidance was effective for the Company beginning January 1, 2012. This adoption did not have an impact on the Company’s financial position or results of operations.

Other than those pronouncements discussed above, there were no other recently issued accounting pronouncements that are expected to impact the Company.

Note 2. Loans and Allowance for Loan Losses

For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).

 

10


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

The following schedule details the loans of the Company at June 30, 2012 and December 31, 2011:

 

     (In Thousands)  
     June 30,
2012
    December 31,
2011
 

Mortgage loans on real estate

    

Residential 1-4 family

   $ 338,045        344,029   

Multifamily

     10,497        9,791   

Commercial

     443,747        422,531   

Construction and land development

     181,963        166,460   

Farmland

     26,754        35,691   

Second mortgages

     13,502        14,711   

Equity lines of credit

     38,007        39,307   
  

 

 

   

 

 

 

Total mortgage loans on real estate

     1,052,515        1,032,520   
  

 

 

   

 

 

 

Commercial loans

     35,884        38,736   
  

 

 

   

 

 

 

Agricultural loans

     2,476        2,556   
  

 

 

   

 

 

 

Consumer installment loans:

    

Personal

     39,054        41,521   

Credit cards

     2,959        3,168   
  

 

 

   

 

 

 

Total consumer installment loans

     42,013        44,689   
  

 

 

   

 

 

 

Other loans

     3,713        6,788   
  

 

 

   

 

 

 
     1,136,601        1,125,289   
  

 

 

   

 

 

 

Net deferred loan fees

     (2,366     (2,031
  

 

 

   

 

 

 

Total loans, net of deferred loan fees

     1,134,235        1,123,258   
  

 

 

   

 

 

 

Less: Allowance for loan losses

     (25,267     (24,525
  

 

 

   

 

 

 

Net Loans

   $ 1,108,968      $ 1,098,733   
  

 

 

   

 

 

 

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

 

11


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

Transactions in the allowance for loan losses for the six months ended June 30, 2012 and year ended December 31, 2011 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  

June 30, 2012

                        

Allowance for loan losses:

                        

Beginning balance

   $ 5,414        54         8,242        6,223        1,829        326        653        1,309        19         456        24,525   

Provision

     773        4         2,211        1,889        162        14        (32     (610     7         48        4,466   

Charge-offs

     (475     —           (1,233     (1,567     (424     (47     (41     (208     —           (144     (4,139

Recoveries

     33        —           63        164        7        —          —          54        —           94        415   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 5,745        58         9,283        6,709        1,574        293        580        545        26         454        25,267   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ 1,350        —           3,422        1,957        1,048        49        36        160        —           —          8,022   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 4,395        58         5,861        4,752        526        244        544        385        26         454        17,245   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

   $ —          —           —          —          —          —          —          —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans:

                        

Ending balance

   $ 338,045        10,497         443,747        181,963        26,754        13,502        38,007        35,884        2,476         45,726        1,136,601   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ 10,686        —           21,433        14,999        2,847        882        275        245        —           —          51,367   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 327,359        10,497         422,314        166,964        23,907        12,620        37,732        35,639        2,476         45,726        1,085,234   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

   $ —          —           —          —          —          —          —          —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

12


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

     (In Thousands)  
     Residential
1-4 Family
    Multifamily      Commercial
Real Estate
    Construction     Farmland     Second
Mortgages
    Equity Lines
of Credit
    Commercial     Agricultural     Installment
and Other
    Total  

December 31, 2011

                       

Allowance for loan losses:

                       

Beginning balance

   $ 5,140        46         7,285        5,558        988        276        767        1,163        67        887        22,177   

Provision

     2,311        8         2,228        2,279        1,137        311        18        640        (47     (207     8,678   

Charge-offs

     (2,108     —           (1,283     (1,681     (296     (268     (148     (516     (1     (461     (6,762

Recoveries

     71        —           12        67        —          7        16        22        —          237        432   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,414        54         8,242        6,223        1,829        326        653        1,309        19        456        24,525   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ 1,053        —           3,744        2,228        1,193        41        15        754        —          —          9,028   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 4,361        54         4,498        3,995        636        285        638        555        19        456        15,497   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

   $ —          —           —          —          -6        —          —          —          —          —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                       

Ending balance

   $ 344,029        9,791         422,531        166,460        35.6916        14,711        39,307        38,736        2,556        51,477        1,125,289   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance individually evaluated for impairment

   $ 11,573        412         23,682        16,633        .4,2616        922        170        849        —          —          58,502   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance collectively evaluated for impairment

   $ 332,456        9,379         398,849        149,827        ,31.4306        13,789        39,137        37.887        2,556        51,477        1,066,787   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance loans acquired with deteriorated credit quality

   $ —          —           —          —          -6        —          —          —          —          —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

At June 30, 2012, the Company had certain impaired loans of $22,101,000 which were on non- accruing interest status. At December 31, 2011, the Company had certain impaired loans of $24,965,000 which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The following table presents the Company’s impaired loans at June 30, 2012 and December 31, 2011.

 

     In Thousands  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

June 30, 2012

              

With no related allowance recorded:

              

Residential 1-4 family

   $ 4,479         4,479         —           4,853         120   

Multifamily

     —           —           —           205         —     

Commercial real estate

     5,500         5,500         —           6,003         64   

Construction

     9,430         9,430         —           9,306         34   

Farmland

     —           —           —           74         —     

Second mortgages

     728         728         —           729         4   

Equity lines of credit

     —           —           —           —           —     

Commercial

     —           —           —           —           —     

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,137         20,137         —           21,170         222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With allowance recorded:

              

Residential 1-4 family

   $ 6,207         6,207         1,350         5,831         137   

Multifamily

     —           —           —           —           —     

Commercial real estate

     15,933         15,933         3,422         16,466         261   

Construction

     5,569         5,568         1,957         7,008         31   

Farmland

     2,847         2,847         1,048         3,477         27   

Second mortgages

     154         154         49         155         —     

Equity lines of credit

     275         275         36         223         8   

Commercial

     245         245         160         433         —     

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,230         31,229         8,022         33,593         464   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Residential 1-4 family

   $ 10,686         10,686         1,350         10,684         257   

Multifamily

     —           —           —           205         —     

Commercial real estate

     21,433         21,433         3,422         22,469         325   

Construction

     14,999         14,998         1,957         16,314         65   

Farmland

     2,847         2,847         1,048         3,551         27   

Second mortgages

     882         882         49         884         4   

Equity lines of credit

     275         275         36         223         8   

Commercial

     245         245         160         433         —     

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,367         51,366         8,022         54,763         686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

14


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

     In Thousands  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

December 31, 2011

              

With no related allowance recorded:

              

Residential 1-4 family

   $ 6,263         6,439         —           4,670         271   

Multifamily

     412         412         —           414         23   

Commercial real estate

     6,711         6,711         —           4,461         268   

Construction

     8,418         8,918         —           7,327         186   

Farmland

     —           —           —           1,366         —     

Second mortgages

     606         606         —           606         —     

Equity lines of credit

     —           —           —           93         —     

Commercial

     —           176         —           51         —     

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 22,410         23,262         —           18,988         748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With allowance recorded:

              

Residential 1-4 family

   $ 5,310         5,310         1,053         7,361         262   

Multifamily

     —           —           —           —           —     

Commercial real estate

     16,971         16,971         3,744         15,826         673   

Construction

     8,215         8,215         2,228         12,250         137   

Farmland

     4,261         4,261         1,193         3,181         129   

Second mortgages

     316         316         41         199         10   

Equity lines of credit

     170         170         15         43         8   

Commercial

     849         849         754         928         32   

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 36,092         36,092         9,028         39,788         1,251   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Residential 1-4 family

   $ 11,573         11,749         1,053         12,031         533   

Multifamily

     412         412         —           414         23   

Commercial real estate

     23,682         23,682         3,744         20,287         941   

Construction

     16,633         17,133         2,228         19,577         323   

Farmland

     4,261         4,261         1,193         4,547         129   

Second mortgages

     922         922         41         805         10   

Equity lines of credit

     170         170         15         136         8   

Commercial

     849         1,025         754         979         32   

Agricultural

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 58,502       $ 59,354         9,028         58,776         1,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans also include loans that the Company may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may have to 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 noted above. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

 

15


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

The following table outlines the amount of each troubled debt restructuring categorized by loan classification

for the six months ended June 30, 2012 and the year ended December 31, 2011:

 

     June 30, 2012      December 31, 2011  
                   Post                    Post  
                   Modification                    Modification  
           

Pre

Modification

Outstanding

Recorded

     Outstanding            

Pre

Modification

Outstanding

Recorded

     Outstanding  
               Recorded                Recorded  
               Investment,                Investment,  
     Number
of
        Net of
Related
     Number
of
        Net of
Related
 
     Contracts      Investment      Allowance      Contracts      Investment      Allowance  

Residential 1-4 family

     1       $ 404       $ 404         1       $ 3,938       $ 3,088   

Multifamily

     —           —           —           —           —           —     

Commercial real estate

     1         421         421         —           —           —     

Construction

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     

Second mortgages

     —           —           —           —           —           —     

Equity lines of credit

     —           —           —           —           —           —     

Commercial

     —           —           —           1         245         95   

Agricultural, installment and other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 825       $ 825         1       $ 4,183       $ 3,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

Potential problem loans, which include nonperforming loans, amounted to approximately $60.4 million at June 30, 2012 compared to $67.3 million at December 31, 2011. Potential problem loans represent those loans with a well defined weakness and where information about possible credit problems of borrowers have caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Company’s primary federal regulator, for loans classified as special mention, substandard, or doubtful, excluding the impact of nonperforming loans.

The following table presents our loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:

 

   

Special Mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date.

 

   

Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful loans have all the characteristics of substandard loans with the added 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 Company considers all doubtful loans to be impaired and places the loan on nonaccrual status.

 

17


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

 

     (In Thousands)  
     Residential
1-4 Family
     Multifamily      Commercial
Real Estate
     Construction      Farmland      Second
Mortgages
     Equity Lines
of Credit
     Commercial      Agricultural      Installment
and Other
     Total  

June 30, 2012

                                

Credit Risk Profile by Internally Assigned Grade

                                

Pass

   $ 321,119         10,444         421,834         166,614         23,694         12,008         37,385         35,528         2,449         45,150         1,076,225   

Special Mention

     9,900         53         6,346         249         77         657         445         35         5         202         17,969   

Substandard

     7,026         —           15,567         15,100         2,983         837         177         321         22         374         42,407   

Doubtful

     —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 338,045         10,497         443,747         181,963         26,754         13,502         38,007         35,884         2,476         45,726         1,136,601   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                                

Credit Risk Profile by Internally Assigned Grade

                                

Pass

   $ 326,406         9,245         398,459         149,451         31,251         13,158         38,803         37,691         2,534         51,010         1,058,008   

Special Mention

     9,537         53         7,963         459         76         517         316         37         —           157         19,115   

Substandard

     8,086         493         16,109         16,550         4,364         1,036         188         1,008         22         310         48,166   

Doubtful

     —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 344,029         9,791         422,531         166,460         35,691         14,711         39,307         38,736         2,556         51,477         1,125,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

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 June 30, 2012 and December 31, 2011 are summarized as follows:

 

     June 30, 2012
Securities Available-For-Sale
 
     In Thousands  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market
Value
 

U.S. Government-sponsored enterprises (GSEs)*

   $ 134,181       $ 502       $ 28       $ 134,655   

Mortgage-backed:

           

GSE residential

     201,787         1,943         202         203,528   

Obligations of states and political subdivisions

     7,494         97         41       $ 7,550   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 343,462       $ 2,542       $ 271       $ 345,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2012
Securities Held-To-Maturity
 
     In Thousands  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market
Value
 

Mortgage-backed:

           

GSE residential

   $ 3,450       $ 137       $ —         $ 3,587   

Obligations of states and political subdivisions

     11,960         646         6         12,600   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,410       $ 783       $ 6       $ 16,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Home Loan Banks, Federal Farm Credit Banks, and government National Mortgage Association.

 

19


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

     December 31, 2011
Securities Available-For-Sale
 
     In Thousands  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Loss
     Estimated
Market
Value
 

U.S. Government-sponsored enterprises (GSEs)*

   $ 114,819       $ 268       $ 161       $ 114,926   

Mortgage-backed:

           

GSE residential

     192,989         1,379         201         194,167   

Obligations of states and political subdivisions

     1,521         117         —           1,638   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 309,329       $ 1,764       $ 362       $ 310,731   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011
Securities Held-To-Maturity
 
     In Thousands  

Mortgage-backed:

           

GSE residential

   $ 2,425       $ 103       $ —         $ 2,528   

Obligations of states and political subdivisions

     12,039         699         —           12,738   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,464       $ 802       $ —         $ 15,266   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* 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 amortized cost and estimated market value of debt securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Held-to-Maturity      Available-for-sale  
     In Thousands  
            Estimated             Estimated  
     Amortized      Market      Amortized      Market  
     Cost      Value      Cost      Value  

Due in one year or less

   $ 1,743       $ 1,772       $ —         $ —     

Due after one year through five years

     5,867         6,194         52,379         52,495   

Due after five years through ten years

     2,695         2,856         192,133         193,511   

Due after ten years

     5,105         5,365         98,950         99,727   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,410       $ 16,187       $ 343,462       $ 345,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011.

 

     In Thousands, Except Number of Securities  
     Less than 12 Months      12 Months or More      Total  
June 30, 2012    Fair
Value
     Unrealized
Losses
     Number
of
Securities
Included
     Fair
Value
     Unrealized
Losses
     Number
of
Securities
Included
     Fair
Value
     Unrealized
Losses
 

Held to Maturity Securities:

                    

Mortgage-backed:

                       

GSE residential

   $ —         $ —           —         $ —         $ —           —         $ —         $ —     

Obligations of states and political subdivisions

     335         6         1         —           —           —           335         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 335       $ 6         1       $ —           —           —         $ 335       $ 6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale Securities:

                       

U.S. Government — Sponsored enterprises (GSEs)

   $ 11,471       $ 28         4       $ —         $ —           —         $ 11,471       $ 28   

Mortgage-backed:

                       

GSE residential

     35,405         202         11         —           —           —           35,405         202   

Obligations of states and political subdivisions

     3,733         41         9         —           —           —           3,733         41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 50,609       $ 271         24       $ —         $ —           —         $ 50,609       $ 271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     In Thousands, Except Number of Securities  
     Less than 12 Months  
December 31, 2011    Fair
Value
     Unrealized
Losses
     Number
of
Securities
Included
     Fair
Value
     Unrealized
Losses
     Number
of
Securities
Included
     Fair
Value
     Unrealized
Losses
 

Held to Maturity Securities:

                       

Mortgage-backed:

                       

GSE residential

   $ —         $ —           —         $ —         $ —           —         $ —         $ —     

Obligations of states and political subdivisions

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —           —         $ —           —           —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-Sale Securities:

                       

U.S. Government — Sponsored enterprises (GSEs)

     48,810         161         14         —           —           —           48,810         161   

Mortgage-backed:

                       

GSE residential

     58,130         201         12         —           —           —           58,130         201   

Obligations of states and political subdivisions

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 106,940       $ 362         26       $ —           —           —         $ 106,940       $ 362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

Because the Company does not intend to sell these securities and it is unlikely that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be at maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

The carrying values of the Company’s investment securities could decline in the future if the financial condition of issuers deteriorate and management determines it is probable that the Company will not recover the entire amortized cost bases of the securities. As a result, there is a risk that other-than-temporary impairment charges may occur in the future given the current economic environment.

Note 4. 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 three months and six months ended June 30, 2012 and 2011:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  
     (Dollars in Thousands      (Dollars in Thousands  
     Except Per Share Amounts)      Except Per Share Amounts)  

Basic EPS Computation:

           

Numerator — Earnings available to common stockholders

   $ 3,149       $ 2,615       $ 5,974       $ 5,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator — Weighted average number of common shares outstanding

     7,347,346         7,268,537         7,339,430         7,263,342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ .43       $ .36       $ .81       $ .70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS Computation:

           

Numerator — Earnings available to common stockholders

   $ 3,149       $ 2,615       $ 5,974       $ 5,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator — Weighted average number of common shares outstanding

     7,347,346         7,268,537         7,339,430         7,263,342   

Dilutive effect of stock options

     5,565         7,548         4,763         6,944   
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,352,911         7,276,085         7,344,193         7,270,286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ .43       $ .36       $ .81       $ .70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Income Taxes

Accounting Standards Codification (“ASC”) 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of June 30, 2012, the Company had no unrecognized tax benefits related to Federal or State income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to June 30, 2012.

 

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Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

As of June 30, 2012, the Company has accrued no interest and no penalties related to uncertain tax positions. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company and its subsidiaries file consolidated U.S. Federal and state of Tennessee income tax returns. The Company is currently open to audit under the statute of limitations by the state of Tennessee for the years ended December 31, 2008 through 2011 and the IRS for the years ended December 31, 2007 through 2011.

Note 6. Commitments and Contingent Liabilities

In the normal course of business, the Company has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Standby letters of credit are generally issued on behalf of an applicant (our customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Company under certain prescribed circumstances. Subsequently, the Company would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Company follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, the Company’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

 

23


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

A summary of the Company’s total contractual amount for all off-balance sheet commitments at June 30, 2012 is as follows:

 

Commitments to extend credit

   $ 199,717,000   

Standby letters of credit

     23,151,000   

The Company originates residential mortgage loans, sells them to third-party purchasers, and does not retain the servicing rights. These loans are originated internally and are primarily to borrowers in the Company’s geographic market footprint. These sales are typically on a best efforts basis to investors that follow conventional government sponsored entities (GSE) and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs (HUD/VA) guidelines. Generally, loans held for sale are underwritten by the Company, including HUD/VA loans.

Each purchaser has specific guidelines and criteria for sellers of loans, and the risk of credit loss with regard to the principal amount of the loans sold is generally transferred to the purchasers upon sale. While the loans are sold without recourse, the purchase agreements require the Company to make certain representations and warranties regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan. If it is determined that the loans sold were in breach of these representations or warranties, the Company has obligations to either repurchase the loan for the unpaid principal balance and related investor fees or make the purchaser whole for the economic benefits of the loan.

To date, repurchase activity pursuant to the terms of these representations and warranties has been insignificant and has resulted in insignificant losses to the Company.

Based on information currently available, management believes that it does not have significant exposure to contingent losses that may arise relating to the representations and warranties that it has made in connection with its mortgage loan sales.

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at June 30, 2012 will not have a material impact on the Company’s financial statements.

Note 7. Fair Value Measurements

FASB ASC 820, “Fair Value Measurements and Disclosures.” which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC 820 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.

 

24


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

Valuation Hierarchy

FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 —inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 —inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 —inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Assets

Securities available for sale — Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Impaired loans — A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses or the expense is recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy due to the unobservable inputs used in determining their fair value, such as collateral values and the borrowers underlying financial condition.

Other real estate — Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is initially recorded at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the fair value are recorded as a component of foreclosed real estate expense. Other real estate is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value. Appraisal values are property specific and sensitive to the changes in the overall economic environment.

Other assets — Included in other assets are certain assets carried at fair value, including the cash surrender value of bank owned life insurance policies. The carrying amount of the cash surrender value of bank owned life insurance is based on information received from the insurance carriers indicating the

 

25


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

financial performance of the policies and the amount the Company would receive should the policies be surrendered. The Company reflects these assets within Level 3 of the valuation hierarchy due to unobservable inputs included in the valuation of these items.

The following tables present the financial instruments carried at fair value as of June 30, 2012 and December 31, 2011, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as described above).

Assets and liabilities measured at fair value on a recurring basis are summarized below:

Fair Value Measurements at June 30, 2012

 

(in Thousands)    Carrying
Value at

June 30,
2012
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs  (Level 3)
 

Assets:

     

Available-for-sale securities

   $ 345,733       $ —         $ 345,733       $ —     

Cash surrender value of life insurance

     2,276         —           —           2,276   

Fair Value Measurements at December 31, 2011

 

(in Thousands)    Carrying
Value at

December 31,
2011
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

     

Available-for-sale securities

   $ 310,731       $ —         $ 310,731       $ —     

Cash surrender value of life insurance

     2,001         —           —           2,001   

 

26


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements at June 30, 2012

 

(in Thousands)    Carrying
Value at
June 30,
2012
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

     

Impaired loans

   $         43,345       $ —         $ —         $ 43,345   

Other real estate

     18,256         —           —           18,256   

Repossesed assets

     12         —           —           12   

Fair Value Measurements at December 31, 2011

 

(in Thousands)    Carrying
Value at

December 31,
2011
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets:

     

Impaired loans

   $ 49,474       $ —         $ —         $ 49,474   

Other real estate

     19,117         —           —           19,117   

Repossesed assets

     9         —           —           9   

Changes in level 3 fair value measurements

The table below includes a roll forward of the balance sheet amounts for the six months ended June 30, 2012 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurements. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

The following table presents, for the six months ended June 30, 2012 and 2011, the changes in Level 3

assets and liabilities that are measured at fair value on a recurring basis.

 

     2012      2011  
     Assets      Liabilities      Assets      Liabilities  

Fair value, January 1

   $ 2,001       $ —         $ 1,554       $ —     

Total realized gains inluded in income

     12         —           30         —     

Purchases, issuances and settlements, net

     263         —           —           —     

Transfers in and/or (out) of Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value, June 30

   $ 2,276       $ —           1,584       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at June 30

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments that are not measured at fair value. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2012 and December 31, 2011. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Cash, Due From Banks and Federal Funds Sold — The carrying amounts of cash, due from banks, and federal funds sold approximate their fair value.

Securities held to maturity — Estimated fair values for investment securities are based on quoted market prices where available. If quoted market prices are not available, then fair values are estimated using pricing models that use observable inputs or quoted prices of securities with similar characteristics.

Loans — For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

Mortgage loans held-for-sale — Mortgage loans held-for-sale are carried at the lower of cost or fair value. The estimate of fair value is equal to the carrying value of these loans as they are usually sold within a few weeks of their origination.

Deposits, Securities Sold Under Agreements to Repurchase — The carrying amounts of demand deposits, savings deposits, and securities sold under agreements to repurchase approximate their fair values. Fair values for certificates of deposit are estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities.

Off- Balance Sheet Instruments — The fair values of the Company’s off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to the Company’s until such commitments are funded.

The following table presents the carrying amounts, estimated fair value of the Company’s financial instruments at June 30, 2012 and December 31, 2011. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 

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Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

 

     In Thousands  
     June 30, 2012      December 31, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Cash and short-term Investments

   $ 69,403         69,403       $ 54,174         54,174   

Securities available-for-sale

     345,733         345,733         310,731         310,731   

Securities held to maturity

     15,410         16,187         14,464         15,266   

Loans, net of unearned interest

     1,134,235            1,123,258      

Less: allowance for loan losses

     25,267            24,525      
  

 

 

       

 

 

    

Loans, net of allowance

     1,108,968         1,123,663         1,098,733         1,107,440   
  

 

 

       

 

 

    

Loans held for sale

     6,412         6,412         14,775         14,775   

Restricted equity securities

     3,012         3,012         3,012         3,012   

Accrued interest receivable

     5,604         5,604         5,930         5,930   

Cash surrender value of life insurance

     2,276         2,276         2,001         2,001   

Other real estate

     18,256         18,256         19,117         19,117   

Financial liabilities:

           

Deposits

     1,450,773         1,451,645         1,406,042         1,408,071   

Securities sold under repurchase agreements

     8,374         8,376         7,419         7,389   

Accrued interest payable

     2,031         2,031         2,998         2,998   

Unrecognized financial instruments:

           

Commitments to extend credit

     —           —           —           —     

Standby letters of credit

     —           —           —           —     

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its bank subsidiary. This discussion should be read in conjunction with the consolidated financial statements. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for a more complete discussion of factors that impact liquidity, capital and the results of operations.

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements 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.

 

29


Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, 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, 2011, 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) greater than anticipated deterioration in the real estate market conditions in the Company’s market areas, (iii) increased competition with other financial institutions, (iv) the deterioration of the economy in the Company’s market area, (v) continuation of the extremely low short-term interest rate environment or rapid fluctuations in short-term interest rates, (vi) significant downturns in the business of one or more large customers, (vii) the inability of the Company to comply with regulatory capital requirements, including those resulting from recently proposed 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, and (xiii) loss of key personnel. These risks and uncertainties may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. The Company’s future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements.

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. There have been significant changes to our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2011.

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 indications 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.

 

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Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

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 eleven 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 eleven loan segments. The estimates for these loans are based on our historical loss data for that category over the last eight quarters.

The estimated loan loss allocation for all eleven 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 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.

 

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WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

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.

Other-than-temporary Impairment. 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 impairment is other-than-temporary, management considers whether the entity expects to recover the entire amortized cost basis of the security by reviewing the present value of the future cash flows associated with the security. The 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 and is deemed to be other-than temporary impairment. If a credit loss is identified, the credit loss is recognized as a charge to earnings and a new cost basis for the security is established. If management concludes that no credit loss exists and it is not more-likely-than-not that it will be required to sell the security before maturity, then the security is not other-than-temporarily impaired and the shortfall is recorded as a component of equity.

Results of Operations

Net earnings increased 17.3% to $5,974,000 for the six months ended June 30, 2012 from $5,091,000 in the first six months of 2011. Net earnings were $3,149,000 for the quarter ended June 30, 2012, an increase of $534,000, or 20.4%, from $2,615,000 for the three months ended June 30, 2011 and an increase of $324,000, or 11.5%, over the quarter ended March 31, 2012. The increase in net earnings during the six months ended June 30, 2012 as compared to the prior year period was primarily due to a 6.0% increase in net interest income and a 16.0% increase in non-interest income, offset in part by a 6.6% increase in non-interest expense. Net yield on earning assets for the six months ended June 30, 2012 was 3.81% as compared to 3.83% for the first six months of 2011. The decrease in net interest yield for the six months ended June 30, 2012 reflects an increase in average earning assets exceeding the increase in net interest income.

 

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Table of Contents

WILSON BANK HOLDING COMPANY

FORM 10-Q, CONTINUED

 

The average balances, interest, and average rates for the six-month periods ended June 30, 2012 and June 30, 2011 are presented in the following table:

 

     June 30, 2012      June 30, 2011  
     Average
Balance
    Interest
Rate
    Income/
Expense
     Average
Balance
    Interest
Rate
    Income/
Expense
 

Loans, net of unearned interest

   $ 1,126,461        5.82     32,752       $ 1,100,888        5.96     32,824   

Investment securities — taxable

     320,048        1.74        2,786         259,049        2.20        2,846   

Investment securities — tax exempt

     13,504        2.99        202         12,908        3.32        214   

Taxable equivalent adjustment

     —          1.54        104         —          1.70        110   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total tax-exempt investment securities

     13,548        4.53        306         12,908        5.02        324   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total investment securities

     333,552        1.85        3,092         271,957        2.33        3,170   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Loans held for sale

     10,929        3.50        191         5,613        3.74        105   

Federal funds sold

     29,669        .43        63         32,521        .26        42   

Restricted equity securities

     3,012        5.08        77         3,012        4.32        65   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total earning assets