Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Nature of Business — Wilson Bank Holding Company (the “Company”) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Wilson Bank & Trust (the “Bank”). The Bank is a commercial bank headquartered in Lebanon, Tennessee. The Bank provides a full range of banking services in its primary market areas of Wilson, Davidson, Rutherford, Trousdale, Sumner, Dekalb, Putnam, Smith, and Williamson Counties, Tennessee. On June 1, 2022, the Bank began operations with a newly-formed joint venture, Encompass Home Lending, LLC ("Encompass") of which the Bank owns 51% of the outstanding membership interests. Encompass offers residential mortgage banking services to customers of certain home builders in our markets.
Basis of Presentation — The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements and related notes appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
These consolidated financial statements include the accounts of the Company, the Bank, and Encompass. 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 credit losses, the valuation of deferred tax assets, determination of any impairment of goodwill or other intangibles, the valuation of other real estate (if any), and the fair value of financial instruments. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to the Company’s significant accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 other than the adoption of ASC 326 as described in Note 1. Summary of Significant Accounting Policies - Accounting Changes, Reclassifications and Restatements and in Note 2 - Loans and Allowance for Credit Losses.
Accounting Changes, Reclassifications and Restatements – Certain items in prior financial statements have been reclassified to conform to the current presentation. In addition, on January 1, 2022, we adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaces the previous “incurred loss” model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new current expected credit loss (“CECL”) model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. ASC 326 also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASC 326 includes certain changes to the accounting for available-for-sale securities including the requirement to present credit losses as an allowance rather than as a direct write-down for available-for-sale securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, we recognized an after-tax cumulative effect increase to retained earnings totaling $1.0 million. Operating results for periods after January 1, 2022 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2021 Form 10-K.
In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below.
Allowance For Credit Losses - Loans — The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be collected. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 2 - Loans and Allowance for Credit Losses.
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures — The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of non-interest expense. Further information regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 11 - Commitments and Contingent Liabilities.
Securities – Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses (those for which no allowance for credit losses are recorded) reported as a component of other comprehensive earnings, net of tax. Securities held for resale in anticipation of short-term market movements are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost.
Interest income on securities includes amortization of purchase premiums and discounts. Premiums and discounts on securities are generally amortized using the interest method with a constant effective yield without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to their earliest call date. A security is placed on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more or (ii) full payment of principal and interest is not expected. Interest accrued but not received for a security placed on non-accrual status is reversed against interest income. Gains and losses on sales are recorded on the trade date and are derived from the amortized cost of the security sold.
Allowance for Credit Losses - Securities Available-for-Sale — For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through net income. If neither criteria is met, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. If the evaluation indicates that a credit loss exists, an allowance for credit losses is recorded for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income.
Recently Issued Accounting Pronouncements
Information about certain recently issued accounting standards updates is presented below. Also refer to Note 1 - Accounting Standards Updates in our 2021 Form 10-K for additional information related to previously issued accounting standards updates.
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. As noted above, effective January 1, 2022 the Company adopted ASU 2016-13, which resulted in a $7.6 million decrease to the allowance for credit losses and a $6.2 million increase to the reserve for unfunded commitments, resulting in a $1.0 million increase in retained earnings (net of taxes). See Note 2 – Loans and Allowance for Credit Losses for additional information.
ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” ASU 2022-01 was issued to expand the scope of assets eligible for portfolio layer method hedging to include all financial assets. The update also expands the current last-of-layer method that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. The last-of-layer method is renamed the portfolio layer method, because more than the last layer of a portfolio could be hedged. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The adoption of ASU 2022-01 is not expected to have a significant impact on our financial statements.
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 was issued to respond to feedback received from post-implementation review of Topic 326. The amendments eliminate the troubled debt restructuring (TDR) recognition and measurement guidance and now require that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosures and include new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. To improve consistency for vintage disclosures, the ASU requires that public business entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The adoption of ASU 2022-02 is not expected to have a significant impact on our financial statements.
Other than those previously discussed, there were no other recently issued accounting pronouncements that are expected to materially impact the Company.
Note 2. Loans and Allowance for Credit Losses
Loans — Loans are reported at their outstanding principal balances less unearned income, the allowance for credit 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.
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 that utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).
The following schedule details the loans of the Company at June 30, 2022 and December 31, 2021:
| | | (In Thousands) | |
| | | June 30, 2022 | | | December 31, 2021 | |
| | | | | | | | | |
| Residential 1-4 family real estate | | $ | 741,595 | | | $ | 689,579 | |
| Commercial and multi-family real estate | | | 930,093 | | | | 908,673 | |
| Construction, land development and farmland | | | 793,775 | | | | 612,659 | |
| Commercial, industrial and agricultural | | | 119,186 | | | | 118,155 | |
| 1-4 family equity lines of credit | | | 121,102 | | | | 92,229 | |
| Consumer and other | | | 79,795 | | | | 74,643 | |
| Total loans before net deferred loan fees | | | 2,785,546 | | | | 2,495,938 | |
| Net deferred loan fees | | | (13,306 | ) | | | (12,024 | ) |
| Total loans | | | 2,772,240 | | | | 2,483,914 | |
| Less: Allowance for credit losses | | | (35,238 | ) | | | (39,632 | ) |
| Net loans | | $ | 2,737,002 | | | $ | 2,444,282 | |
Risk characteristics relevant to each portfolio segment are as follows:
Construction, land development and farmland: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayments substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Residential 1-4 family real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value ("LTV"), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment.
1-4 family equity lines of credit: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV ratios, minimum credit scores, and maximum debt to income ratios. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans, as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.
Commercial and multi-family real estate: Multi-family and commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.
Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.
Commercial, industrial, and agricultural: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Also included in this category are PPP loans guaranteed by the SBA, which totaled $342,000 at June 30, 2022 and $5.0 million at December 31, 2021. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower, if any. The cash flows of borrowers, however, may not be as expected and any collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV ratios on secured consumer loans, minimum credit scores, and maximum debt to income ratios. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
Allowance For Credit Losses ("ACL") - Loans. The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The Company’s discounted cash flow methodology incorporates a probability of default and loss given default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. Together, the probability of default and loss given default model with the use of reasonable and supportable forecasts generate estimates for cash flows expected and not expected to be collected over the estimated life of a loan. Estimates of future expected cash flows ultimately reflect assumptions made concerning net credit losses over the life of a loan. The use of reasonable and supportable forecasts requires significant judgment. Management leverages economic projections from reputable and independent third parties to inform and provide its reasonable and supportable economic forecasts. The Company’s model reverts to a straight line basis for purposes of estimating cash flows beyond a period deemed reasonable and supportable. The Company forecasts probability of default and loss given default based on economic forecast scenarios over a four quarter time period before reverting to a straight line basis for a four quarter time period. The duration of the forecast horizon, the period over which forecasts revert to a straight line basis, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio. Changes in economic forecasts, in conjunction with changes in loan specific attributes, impact a loan’s probability of default and loss given default, which can drive changes in the determination of the ACL. Expectations of future cash flows are discounted at the loan’s effective interest rate. The resulting ACL represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows expected to be collected. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is the Company’s policy to charge-off loan balances at the time they have been deemed uncollectible.
For segments where the discounted cash flow methodology is not used, a remaining life methodology is utilized. The remaining life method uses an average annual charge-off rate applied to the contractual term, further adjusted for estimated prepayments to determine the unadjusted historical charge-off rate for the remaining balance of assets.
The estimated loan losses for all loan segments are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon the following:
| | 1. | Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. |
| | 2. | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. |
| | 3. | Changes in the nature and volume of the portfolio and in the terms of loans. |
| | 4. | Changes in the experience, ability, and depth of lending management and other relevant staff. |
| | 5. | Changes in the volume and severity of past-due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans. |
| | 6. | Changes in the quality of the Company's loan review system. |
| | 7. | Changes in the value of underlying collateral for collateral-dependent loans. |
| | 8. | The existence and effect of any concentrations of credit, and changes in the level of such concentrations. |
| | 9. | The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing portfolio. |
The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan segment based on the assessment of these various qualitative factors.
Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. Individual evaluations are generally performed for loans greater than $500,000 which have experienced significant credit deterioration. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral, less selling costs. For loans for which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral, the Company has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, with selling costs considered in the event sale of the collateral is expected. Loans for which terms have been modified in a TDR are evaluated using these same individual evaluation methods. In the event the discounted cash flow method is used for a TDR, the original interest rate is used to discount expected cash flows.
In assessing the adequacy of the allowance for credit losses, the Company considers the results of the Company's ongoing independent loan review process. The Company undertakes this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in its overall evaluation of the risk characteristics of the entire loan portfolio. Its loan review process includes the judgment of management, independent internal loan reviewers and reviews that may have been conducted by third-party reviewers including regulatory examiners. The Company incorporates relevant loan review results in the allowance.
In accordance with CECL, losses are estimated over the remaining contractual terms of loans, adjusted for prepayments and curtailment. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed or such renewals, extensions or modifications are included in the original loan agreement and are not unconditionally cancellable by the Company.
Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding and deferred loan fees and costs.
While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
Allowance for Loan Losses (allowance) - Prior to the Adoption of FASB ASC 326 on January 1, 2022, which introduced the CECL methodology for credit losses, the allowance for loan losses was composed of the result of two independent analyses pursuant to the provisions of ASC 450-20, Loss Contingencies and ASC 310-10-35, Receivables. The ASC 450-20 analysis was intended to quantify the inherent risks in the performing loan portfolio. The ASC 310-10-35 analysis included a loan-by-loan analysis of impaired loans, primarily consisting of loans reported as nonaccrual or troubled-debt restructurings.
The allowance allocation began with a process of estimating the probable losses in each of the twelve loan segments. The estimates for these loans were based on our historical loss data for that category over twenty quarters. Each segment was then analyzed such that an allocation of the allowance was estimated for
each loan segment.
The estimated loan loss allocation for all twelve loan portfolio segments was then adjusted for several “environmental” factors. The allocation for environmental factors is particularly subjective and did not lend itself to exact mathematical calculation. This amount represented estimated probable inherent credit losses which existed, but had not yet been identified, as of the balance sheet date, and were 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, increase in interest rates, or procedures and other influencing factors. These environmental factors were considered for each of the twelve loan segments and the allowance allocation, as determined by the processes noted above for each component, was increased or decreased through provision expense based on the incremental assessment of those various environmental factors.
We then tested the resulting allowance by comparing the balance in the allowance to industry and peer information. Our management then evaluated the result of the procedures performed, including the result of our testing, and concluded on the appropriateness of the balance of the allowance in its entirety. The board of
directors reviewed and approved the assessment prior to the filing of quarterly and annual financial information.
A loan was impaired when, based on current information and events, it was probable that we would 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 would be collected as scheduled in the loan agreement.
An impairment allowance was recognized if the fair value of the loan was less than the recorded investment in the loan (recorded investment in the loan was the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment was recognized through the allowance. Loans that were impaired were recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan was collateral dependent, impairment measurement was based on the fair value of the collateral, less estimated disposal costs. If the measure of the impaired loan was less than the recorded investment in the loan, the Company recognized 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 followed appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.
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.
Transactions in the allowance for credit losses for the six months ended June 30, 2022 and allowance for loan losses for the six months ended June 30, 2021 are summarized as follows:
| | | (In Thousands) | |
| | | Residential 1-4 Family Real Estate | | | Commercial and Multi-family Real Estate | | | Construction, Land Development and Farmland | | | Commercial, Industrial and Agricultural | | | 1-4 family Equity Lines of Credit | | | Consumer and Other | | | Total | |
| June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, | | $ | 9,242 | | | | 16,846 | | | | 9,757 | | | | 1,329 | | | | 1,098 | | | | 1,360 | | | | 39,632 | |
| Impact of adopting ASC 326 | | | (3,393 | ) | | | (3,433 | ) | | | (266 | ) | | | 219 | | | | (324 | ) | | | (367 | ) | | | (7,564 | ) |
| Provision for credit losses on loans | | | 432 | | | | 196 | | | | 2,199 | | | | (13 | ) | | | 142 | | | | 561 | | | | 3,517 | |
| Charge-offs | | | — | | | | — | | | | — | | | | — | | | | — | | | | (593 | ) | | | (593 | ) |
| Recoveries | | | 10 | | | | — | | | | 6 | | | | 7 | | | | — | | | | 223 | | | | 246 | |
| Ending balance | | $ | 6,291 | | | | 13,609 | | | | 11,696 | | | | 1,542 | | | | 916 | | | | 1,184 | | | | 35,238 | |
| | | (In Thousands) | |
| | | Residential 1-4 Family Real Estate | | | Commercial and Multi-family Real Estate | | | Construction, Land Development and Farmland | | | Commercial, Industrial and Agricultural | | | 1-4 family Equity Lines of Credit | | | Consumer and Other | | | Total | |
| June 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance January 1, | | $ | 8,203 | | | | 18,343 | | | | 8,090 | | | | 1,391 | | | | 997 | | | | 1,515 | | | | 38,539 | |
| Provision | | | 289 | | | | (760 | ) | | | 1,257 | | | | (98 | ) | | | 51 | | | | 143 | | | | 882 | |
| Charge-offs | | | — | | | | — | | | | (23 | ) | | | (3 | ) | | | — | | | | (414 | ) | | | (440 | ) |
| Recoveries | | | 48 | | | | — | | | | 29 | | | | 4 | | | | — | | | | 252 | | | | 333 | |
| Ending balance | | $ | 8,540 | | | | 17,583 | | | | 9,353 | | | | 1,294 | | | | 1,048 | | | | 1,496 | | | | 39,314 | |
Transactions in the allowance for credit losses for the three months ended June 30, 2022 and allowance for loan losses for the three months ended June 30, 2021 are summarized as follows:
| | | (In Thousands) | |
| | | Residential 1-4 Family Real Estate | | | Commercial and Multi-family Real Estate | | | Construction, Land Development and Farmland | | | Commercial, Industrial and Agricultural | | | 1-4 family Equity Lines of Credit | | | Consumer and Other | | | Total | |
| June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance April 1, | | $ | 5,910 | | | | 14,032 | | | | 10,396 | | | | 1,588 | | | | 857 | | | | 995 | | | | 33,778 | |
| Provision for credit losses | | | 379 | | | | (423 | ) | | | 1,297 | | | | (46 | ) | | | 59 | | | | 359 | | | | 1,625 | |
| Charge-offs | | | — | | | | — | | | | — | | | | — | | | | — | | | | (306 | ) | | | (306 | ) |
| Recoveries | | | 2 | | | | — | | | | 3 | | | | — | | | | — | | | | 136 | | | | 141 | |
| Ending balance | | $ | 6,291 | | | | 13,609 | | | | 11,696 | | | | 1,542 | | | | 916 | | | | 1,184 | | | | 35,238 | |
| | | (In Thousands) | |
| | | Residential 1-4 Family Real Estate | | | Commercial and Multi-family Real Estate | | | Construction, Land Development and Farmland | | | Commercial, Industrial and Agricultural | | | 1-4 family Equity Lines of Credit | | | Consumer and Other | | | Total | |
| June 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance April 1, | | $ | 8,041 | | | | 18,892 | | | | 8,600 | | | | 1,305 | | | | 970 | | | | 1,522 | | | | 39,330 | |
| Provision | | | 489 | | | | (1,309 | ) | | | 761 | | | | (15 | ) | | | 78 | | | | 51 | | | | 55 | |
| Charge-offs | | | — | | | | — | | | | (22 | ) | | | — | | | | — | | | | (190 | ) | | | (212 | ) |
| Recoveries | | | 10 | | | | — | | | | 14 | | | | 4 | | | | — | | | | 113 | | | | 141 | |
| Ending balance | | $ | 8,540 | | | | 17,583 | | | | 9,353 | | | | 1,294 | | | | 1,048 | | | | 1,496 | | | | 39,314 | |
The following table details the allowance for loan losses and recorded investment in loans by loan classification and by impairment evaluation method as of December 31, 2021, as determined in accordance with ASC 310 prior to the adoption of ASC 326:
| | | (In Thousands) | |
| | | Residential 1-4 Family Real Estate | | | Commercial and Multi-family Real Estate | | | Construction, Land Development and Farmland | | | Commercial, Industrial and Agricultural | | | 1-4 family Equity Lines of Credit | | | Consumer and Other | | | Total | |
| December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance individually evaluated for impairment | | $ | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Ending balance collectively evaluated for impairment | | $ | 9,242 | | | | 16,846 | | | | 9,757 | | | | 1,329 | | | | 1,098 | | | | 1,360 | | | | 39,632 | |
| Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 689,579 | | | | 908,673 | | | | 612,659 | | | | 118,155 | | | | 92,229 | | | | 74,643 | | | | 2,495,938 | |
| Ending balance individually evaluated for impairment | | $ | 134 | | | | 531 | | | | — | | | | — | | | | — | | | | — | | | | 665 | |
| Ending balance collectively evaluated for impairment | | $ | 689,445 | | | | 908,142 | | | | 612,659 | | | | 118,155 | | | | 92,229 | | | | 74,643 | | | | 2,495,273 | |
The following table presents the amortized cost basis of collateral dependent loans at June 30, 2022, which are individually evaluated to determine expected credit losses:
| | | In Thousands | |
| | | Real Estate | | | Other | | | Total | |
| June 30, 2022 | | | | | | | | | | | | |
| Residential 1-4 family real estate | | $ | 132 | | | | — | | | | 132 | |
| Commercial and multi-family real estate | | | 518 | | | | — | | | | 518 | |
| Construction, land development and farmland | | | — | | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | | | | — | |
| Consumer and other | | | — | | | | — | | | | — | |
| | | $ | 650 | | | | — | | | | 650 | |
The following table presents impaired loans at December 31, 2021 as determined under ASC 310 prior to the adoption of ASC 326. Impaired loans generally include nonaccrual loans, troubled debt restructurings, and other loans deemed to be impaired but that continue to accrue interest. Presented are the recorded investment, unpaid principal balance and related allowance of impaired loans at December 31, 2021 by loan classification:
| | | December 31, 2021 | |
| | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | |
| | | In Thousands | |
| With no related allowance recorded: | | | | | | | | | | | | |
| Residential 1-4 family real estate | | $ | 136 | | | | 134 | | | | — | |
| Commercial and multi-family real estate | | | 532 | | | | 531 | | | | — | |
| Construction, land development and farmland | | | — | | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | | | | — | |
| Consumer and other | | | — | | | | — | | | | — | |
| | | $ | 668 | | | | 665 | | | | — | |
| With related allowance recorded: | | | | | | | | | | | | |
| Residential 1-4 family real estate | | $ | — | | | | — | | | | — | |
| Commercial and multi-family real estate | | | — | | | | — | | | | — | |
| Construction, land development and farmland | | | — | | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | | | | — | |
| Consumer and other | | | — | | | | — | | | | — | |
| | | $ | — | | | | — | | | | — | |
| Total: | | | | | | | | | | | | |
| Residential 1-4 family real estate | | $ | 136 | | | | 134 | | | | — | |
| Commercial and multi-family real estate | | | 532 | | | | 531 | | | | — | |
| Construction, land development and farmland | | | — | | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | | | | — | |
| Consumer and other | | | — | | | | — | | | | — | |
| | | $ | 668 | | | | 665 | | | | — | |
The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the six months ended June 30, 2021, respectively, of impaired loans by loan classification as determined under ASC 310 prior to the adoption of ASC 326:
| | | June 30, 2021 | |
| | | Average Recorded Investment | | | Interest Income Recognized | |
| | | In Thousands | |
| With no related allowance recorded: | | | | | | | | |
| Residential 1-4 family real estate | | $ | 1,114 | | | | 3 | |
| Commercial and multi-family real estate | | | 207 | | | | — | |
| Construction, land development and farmland | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | |
| Consumer and other | | | — | | | | — | |
| | | $ | 1,321 | | | | 3 | |
| With related allowance recorded: | | | | | | | | |
| Residential 1-4 family real estate | | $ | 1,216 | | | | 31 | |
| Commercial and multi-family real estate | | | 620 | | | | 12 | |
| Construction, land development and farmland | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | |
| Consumer and other | | | — | | | | — | |
| | | $ | 1,836 | | | | 43 | |
| Total: | | | | | | | | |
| Residential 1-4 family real estate | | $ | 2,330 | | | | 34 | |
| Commercial and multi-family real estate | | | 827 | | | | 12 | |
| Construction, land development and farmland | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | |
| Consumer and other | | | — | | | | — | |
| | | $ | 3,157 | | | | 46 | |
Loans are placed on nonaccrual status when there is a significant deterioration in the financial condition of the borrower, which often is determined when the principal or interest on the loan is more than 90 days past due, unless the loan is both well-secured and in the process of collection. Generally, all interest accrued but not collected for loans that are placed on nonaccrual status, is reversed against current income. Interest income is subsequently recognized only to the extent cash payments are received while the loan is classified as nonaccrual, but interest income recognition is reviewed on a case-by-case basis. A nonaccrual loan is returned to accruing status once the loan has been brought current and collection is reasonably assured or the loan has been “well-secured” through other techniques. Past due status is determined based on the contractual due date per the underlying loan agreement.
The following tables present the Company’s nonaccrual loans and past due loans as of June 30, 2022 and December 31, 2021.
Loans on Nonaccrual Status
| | | In Thousands | |
| | | June 30, | | | December 31, | |
| | | 2022 | | | 2021 | |
| Residential 1-4 family real estate | | $ | — | | | $ | — | |
| Commercial and multi-family real estate | | | — | | | | — | |
| Construction, land development and farmland | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | |
| Consumer and other | | | — | | | | — | |
| Total | | $ | — | | | $ | — | |
Past Due Loans
| | | (In thousands) | |
| | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Non Accrual and Greater Than 90 Days Past Due | | | Total Non Accrual and Past Due | | | Current | | | Total Loans | | | Recorded Investment Greater Than 90 Days Past Due and Accruing | |
| June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential 1-4 family real estate | | $ | 706 | | | | 239 | | | | 1,084 | | | | 2,029 | | | | 739,566 | | | | 741,595 | | | $ | 1,084 | |
| Commercial and multi-family real estate | | | 331 | | | | — | | | | — | | | | 331 | | | | 929,762 | | | | 930,093 | | | | — | |
| Construction, land development and farmland | | | 357 | | | | 25 | | | | — | | | | 382 | | | | 793,393 | | | | 793,775 | | | | — | |
| Commercial, industrial and agricultural | | | 149 | | | | — | | | | 9 | | | | 158 | | | | 119,028 | | | | 119,186 | | | | 9 | |
| 1-4 family equity lines of credit | | | 148 | | | | 20 | | | | — | | | | 168 | | | | 120,934 | | | | 121,102 | | | | — | |
| Consumer and other | | | 254 | | | | 67 | | | | 209 | | | | 530 | | | | 79,265 | | | | 79,795 | | | | 209 | |
| Total | | $ | 1,945 | | | | 351 | | | | 1,302 | | | | 3,598 | | | | 2,781,948 | | | | 2,785,546 | | | $ | 1,302 | |
| December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential 1-4 family real estate | | $ | 2,072 | | | | 169 | | | | 357 | | | | 2,598 | | | | 686,981 | | | | 689,579 | | | $ | 357 | |
| Commercial and multi-family real estate | | | — | | | | — | | | | — | | | | — | | | | 908,673 | | | | 908,673 | | | | — | |
| Construction, land development and farmland | | | 1,154 | | | | 215 | | | | — | | | | 1,369 | | | | 611,290 | | | | 612,659 | | | | — | |
| Commercial, industrial and agricultural | | | 59 | | | | 81 | | | | — | | | | 140 | | | | 118,015 | | | | 118,155 | | | | — | |
| 1-4 family equity lines of credit | | | 170 | | | | — | | | | 9 | | | | 179 | | | | 92,050 | | | | 92,229 | | | | 9 | |
| Consumer and other | | | 287 | | | | 99 | | | | 23 | | | | 409 | | | | 74,234 | | | | 74,643 | | | | 23 | |
| Total | | $ | 3,742 | | | | 564 | | | | 389 | | | | 4,695 | | | | 2,491,243 | | | | 2,495,938 | | | $ | 389 | |
The Bank’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring ("TDR"), where economic or other concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
The following table summarizes the carrying balances of TDRs at June 30, 2022 and December 31, 2021.
| | | June 30, 2022 | | | December 31, 2021 | |
| | | (In thousands) | |
| Performing TDRs | | $ | 865 | | | $ | 876 | |
| Nonperforming TDRs | | | 132 | | | | 165 | |
| Total TDRS | | $ | 997 | | | $ | 1,041 | |
The following table outlines the amount of each troubled debt restructuring, categorized by loan classification, made during the six months ended June 30, 2022 and the six months ended June 30, 2021 (in thousands, except for number of contracts):
| | | June 30, 2022 | | | June 30, 2021 | |
| | | Number of Contracts | | | Pre Modification Outstanding Recorded Investment | | | Post Modification Outstanding Recorded Investment, Net of Related Allowance | | | Number of Contracts | | | Pre Modification Outstanding Recorded Investment | | | Post Modification Outstanding Recorded Investment, Net of Related Allowance | |
| Residential 1-4 family real estate | | | — | | | $ | — | | | $ | — | | | | — | | | $ | — | | | $ | — | |
| Commercial and multi-family real estate | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Construction, land development and farmland | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Commercial, industrial and agricultural | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| 1-4 family equity lines of credit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consumer and other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | | — | | | $ | — | | | $ | — | | | | — | | | $ | — | | | $ | — | |
As of June 30, 2022 and June 30, 2021 the Company had no loan relationships that had been previously classified as a TDR subsequently default within twelve months of restructuring.
As of June 30, 2022 there were no consumer mortgage loans in the process of foreclosure. As of December 31, 2021, the Company's recorded investment in consumer mortgage loans in the process of foreclosure totaled $262,000.
Potential problem loans, which include nonperforming loans, amounted to approximately $5.7 million at June 30, 2022 and $7.7 million at December 31, 2021. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.
The following summary presents the Bank's loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:
| | • | Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. |
| | • | Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
| | • | Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Bank considers all doubtful loans to be collateral dependent and places such loans on nonaccrual status. |
The table below presents loan balances classified within each risk rating category by primary loan type and based on year of origination as of June 30, 2022:
| | | In Thousands | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Revolving | | | | | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Loans | | | Total | |
| June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential 1-4 family real estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 157,554 | | | | 254,798 | | | | 116,002 | | | | 61,618 | | | | 32,272 | | | | 92,690 | | | | 21,639 | | | | 736,573 | |
| Special mention | | | — | | | | — | | | | 918 | | | | — | | | | 149 | | | | 2,071 | | | | 349 | | | | 3,487 | |
| Substandard | | | — | | | | — | | | | 38 | | | | 132 | | | | — | | | | 1,365 | | | | — | | | | 1,535 | |
| Total Residential 1-4 family real estate | | $ | 157,554 | | | | 254,798 | | | | 116,958 | | | | 61,750 | | | | 32,421 | | | | 96,126 | | | | 21,988 | | | | 741,595 | |
| Commercial and multi-family real estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 122,737 | | | | 205,307 | | | | 154,268 | | | | 104,514 | | | | 91,992 | | | | 218,408 | | | | 32,569 | | | | 929,795 | |
| Special mention | | | — | | | | — | | | | 166 | | | | — | | | | — | | | | 41 | | | | — | | | | 207 | |
| Substandard | | | — | | | | — | | | | — | | | | — | | | | — | | | | 91 | | | | — | | | | 91 | |
| Total Commercial and multi-family real estate | | $ | 122,737 | | | | 205,307 | | | | 154,434 | | | | 104,514 | | | | 91,992 | | | | 218,540 | | | | 32,569 | | | | 930,093 | |
| Construction, land development and farmland | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 212,139 | | | | 297,652 | | | | 98,586 | | | | 33,949 | | | | 5,699 | | | | 11,531 | | | | 134,110 | | | | 793,666 | |
| Special mention | | | — | | | | — | | | | — | | | | — | | | | — | | | | 87 | | | | — | | | | 87 | |
| Substandard | | | — | | | | — | | | | — | | | | — | | | | — | | | | 22 | | | | — | | | | 22 | |
| Total Construction, land development and farmland | | $ | 212,139 | | | | 297,652 | | | | 98,586 | | | | 33,949 | | | | 5,699 | | | | 11,640 | | | | 134,110 | | | | 793,775 | |
| Commercial, industrial and agricultural | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 13,311 | | | | 14,750 | | | | 29,527 | | | | 21,584 | | | | 6,540 | | | | 5,467 | | | | 27,899 | | | | 119,078 | |
| Special mention | | | — | | | | 22 | | | | 21 | | | | — | | | | — | | | | 56 | | | | — | | | | 99 | |
| Substandard | | | 8 | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 9 | |
| Total Commercial, industrial and agricultural | | $ | 13,319 | | | | 14,772 | | | | 29,548 | | | | 21,584 | | | | 6,540 | | | | 5,524 | | | | 27,899 | | | | 119,186 | |
| 1-4 family equity lines of credit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 400 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 120,681 | | | | 121,081 | |
| Special mention | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | 11 | |
| Substandard | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | 10 | |
| Total 1-4 family equity lines of credit | | $ | 400 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 120,702 | | | | 121,102 | |
| Consumer and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 18,258 | | | | 15,933 | | | | 8,676 | | | | 7,083 | | | | 611 | | | | 7,126 | | | | 21,981 | | | | 79,668 | |
| Special mention | | | — | | | | 55 | | | | 36 | | | | 6 | | | | — | | | | — | | | | — | | | | 97 | |
| Substandard | | | — | | | | 6 | | | | — | | | | 4 | | | | 17 | | | | 2 | | | | 1 | | | | 30 | |
| Total Consumer and other | | $ | 18,258 | | | | 15,994 | | | | 8,712 | | | | 7,093 | | | | 628 | | | | 7,128 | | | | 21,982 | | | | 79,795 | |
The table below presents loan balances classified within each risk rating category based on year of origination as of June 30, 2022:
| | | In Thousands | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Revolving Loans | | | Total | |
| June 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 524,399 | | | | 788,440 | | | | 407,059 | | | | 228,748 | | | | 137,114 | | | | 335,222 | | | | 358,879 | | | | 2,779,861 | |
| Special mention | | | — | | | | 77 | | | | 1,141 | | | | 6 | | | | 149 | | | | 2,255 | | | | 360 | | | | 3,988 | |
| Substandard | | | 8 | | | | 6 | | | | 38 | | | | 136 | | | | 17 | | | | 1,481 | | | | 11 | | | | 1,697 | |
| Total | | $ | 524,407 | | | | 788,523 | | | | 408,238 | | | | 228,890 | | | | 137,280 | | | | 338,958 | | | | 359,250 | | | | 2,785,546 | |
The following table outlines the risk category of loans as of December 31, 2021:
| | | In Thousands | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Residential 1-4 Family Real Estate | | | Commercial and Multi-family Real Estate | | | Construction, Land Development and Farmland | | | Commercial, Industrial and Agricultural | | | 1-4 Family Equity Lines of Credit | | | Consumer and Other | | | Total | |
| Credit Risk Profile by Internally Assigned Grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 682,527 | | | | 908,409 | | | | 612,537 | | | | 118,058 | | | | 92,208 | | | | 74,513 | | | | 2,488,252 | |
| Special mention | | | 5,566 | | | | — | | | | 93 | | | | 96 | | | | 11 | | | | 89 | | | | 5,855 | |
| Substandard | | | 1,486 | | | | 264 | | | | 29 | | | | 1 | | | | 10 | | | | 41 | | | | 1,831 | |
| Total | | $ | 689,579 | | | | 908,673 | | | | 612,659 | | | | 118,155 | | | | 92,229 | | | | 74,643 | | | | 2,495,938 | |
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, 2022 and December 31, 2021 are summarized as follows:
| | | June 30, 2022 | |
| | | Securities Available-For-Sale | |
| | | In Thousands | |
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Market Value | |
| U.S. Treasury and other U.S. government agencies | | $ | 26,963 | | | | — | | | | 797 | | | | 26,166 | |
| U.S. Government-sponsored enterprises (GSEs) | | | 180,271 | | | | — | | | | 22,191 | | | | 158,080 | |
| Mortgage-backed securities | | | 545,610 | | | | 14 | | | | 53,551 | | | | 492,073 | |
| Asset-backed securities | | | 43,245 | | | | 111 | | | | 1,381 | | | | 41,975 | |
| Corporate bonds | | | 2,500 | | | | — | | | | 49 | | | | 2,451 | |
| Obligations of states and political subdivisions | | | 226,995 | | | | — | | | | 31,633 | | | | 195,362 | |
| | | $ | 1,025,584 | | | | 125 | | | | 109,602 | | | | 916,107 | |
| | | December 31, 2021 | |
| | | Securities Available-For-Sale | |
| | | In Thousands | |
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Market Value | |
| U.S. Treasury and other U.S. government agencies | | $ | 7,320 | | | | — | | | | 99 | | | | 7,221 | |
| U.S. Government-sponsored enterprises (GSEs) | | | 163,700 | | | | 20 | | | | 4,490 | | | | 159,230 | |
| Mortgage-backed securities | | | 465,588 | | | | 2,726 | | | | 6,537 | | | | 461,777 | |
| Asset-backed securities | | | 46,583 | | | | 213 | | | | 83 | | | | 46,713 | |
| Corporate bonds | | | 2,500 | | | | 75 | | | | — | | | | 2,575 | |
| Obligations of states and political subdivisions | | | 220,444 | | | | 2,611 | | | | 2,986 | | | | 220,069 | |
| | | $ | 906,135 | | | | 5,645 | | | | 14,195 | | | | 897,585 | |
Included in mortgage-backed securities are collateralized mortgage obligations totaling $150,891,000 (fair value of $135,264,000) and $130,594,000 (fair value of $128,281,000) at June 30, 2022 and December 31, 2021, respectively.
Securities carried on the balance sheet of approximately $429,296,000 (approximate market value of $381,942,000) and $368,718,000 (approximate market value of $364,893,000) were pledged to secure public deposits and for other purposes as required by law at June 30, 2022 and December 31, 2021, respectively.
The amortized cost and estimated market value of debt securities at June 30, 2022 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.
| | | Available-For-Sale | |
| | | In Thousands | |
| | | Amortized Cost | | | Estimated Market Value | |
| Due in one year or less | | $ | 174 | | | $ | 171 | |
| Due after one year through five years | | | 93,071 | | | | 88,774 | |
| Due after five years through ten years | | | 271,121 | | | | 240,103 | |
| Due after ten years | | | 661,218 | | | | 587,059 | |
| | | $ | 1,025,584 | | | $ | 916,107 | |
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2022 and December 31, 2021.
| | | In Thousands, Except Number of Securities | |
| | | Less than 12 Months | | | 12 Months or More | | | Total | |
| June 30, 2022 | | Fair Value | | | Unrealized Losses | | | Number of Securities Included | | | Fair Value | | | Unrealized Losses | | | Number of Securities Included | | | Fair Value | | | Unrealized Losses | |
| Available-for-Sale Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and other U.S. government agencies | | $ | 26,166 | | | $ | 797 | | | | 7 | | | $ | — | | | $ | — | | | | — | | | $ | 26,166 | | | $ | 797 | |
| U.S. Government-sponsored enterprises (GSEs) | | | 83,193 | | | | 10,037 | | | | 24 | | | | 74,887 | | | | 12,154 | | | | 34 | | | | 158,080 | | | | 22,191 | |
| Mortgage-backed securities | | | 405,151 | | | | 41,392 | | | | 197 | | | | 83,341 | | | | 12,159 | | | | 49 | | | | 488,492 | | | | 53,551 | |
| Asset-backed securities | | | 36,438 | | | | 1,332 | | | | 27 | | | | 439 | | | | 49 | | | | 1 | | | | 36,877 | | | | 1,381 | |
| Corporate bonds | | | 2,451 | | | | 49 | | | | 1 | | | | — | | | | — | | | | — | | | | 2,451 | | | | 49 | |
| Obligations of states and political subdivisions | | | 153,344 | | | | 22,016 | | | | 185 | | | | 42,017 | | | | 9,617 | | | | 42 | | | | 195,361 | | | | 31,633 | |
| | | $ | 706,743 | | | $ | 75,623 | | | | 441 | | | $ | 200,684 | | | $ | 33,979 | | | | 126 | | | $ | 907,427 | | | $ | 109,602 | |
| | | In Thousands, Except Number of Securities | |
| | | Less than 12 Months | | | 12 Months or More | | | Total | |
| December 31, 2021 | | Fair Value | | | Unrealized Losses | | | Number of Securities Included | | | Fair Value | | | Unrealized Losses | | | Number of Securities Included | | | Fair Value | | | Unrealized Losses | |
| Available-for-Sale Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Treasury and other U.S. government agencies | | $ | 7,221 | | | $ | 99 | | | | 3 | | | $ | — | | | $ | — | | | | — | | | $ | 7,221 | | | $ | 99 | |
| U.S. Government-sponsored enterprises (GSEs) | | | 110,981 | | | | 2,466 | | | | 33 | | | | 45,725 | | | | 2,024 | | | | 19 | | | | 156,706 | | | | 4,490 | |
| Mortgage-backed securities | | | 317,211 | | | | 4,644 | | | | 96 | | | | 54,692 | | | | 1,893 | | | | 33 | | | | 371,903 | | | | 6,537 | |
| Asset-backed securities | | | 17,945 | | | | 67 | | | | 9 | | | | 484 | | | | 16 | | | | 1 | | | | 18,429 | | | | 83 | |
| Corporate bonds | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Obligations of states and political subdivisions | | | 83,510 | | | | 1,460 | | | | 74 | | | | 36,225 | | | | 1,526 | | | | 32 | | | | 119,735 | | | | 2,986 | |
| | | $ | 536,868 | | | $ | 8,736 | | | | 215 | | | $ | 137,126 | | | $ | 5,459 | | | | 85 | | | $ | 673,994 | | | $ | 14,195 | |
For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because the Company currently does not intend to sell those securities that have an unrealized loss at June 30, 2022, and it is not more-likely-than-not that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company has determined that no write-down is necessary. In addition, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration, which would require the recognition of an allowance for credit losses. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. The unrealized losses associated with securities at June 30, 2022 are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at June 30, 2022. These securities will continue to be monitored as a part of the Company's ongoing evaluation of credit quality. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. The Company did not have any securities classified as held-to-maturity at June 30, 2022 or December 31, 2021.
Note 4. Derivatives
Derivatives Designated as Fair Value Hedges
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate loans. The hedging strategy on loans converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the maturity dates of the hedged loans.
During the second quarter of 2020, the Company entered into one swap transaction with a notional amount of $30,000,000 pursuant to which the Company pays the counter-party a fixed interest rate and receives a floating rate equal to 1 month LIBOR. The derivative transaction is designated as a fair value hedge.
A summary of the Company's fair value hedge relationships as of June 30, 2022 and December 31, 2021 are as follows (in thousands):
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance Sheet Location |
|
Weighted Average Remaining Maturity (In Years) |
|
|
Weighted Average Pay Rate |
|
|
Receive Rate |
|
Notional Amount |
|
|
Estimated Fair Value |
|
| Interest rate swap agreements - loans |
Other assets |
|
|
7.93 |
|
|
|
0.65 |
% |
|
1 month LIBOR |
|
$ |
30,000 |
|
|
|
3,586 |
|
| December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance Sheet Location |
|
Weighted Average Remaining Maturity (In Years) |
|
|
Weighted Average Pay Rate |
|
|
Receive Rate |
|
Notional Amount |
|
|
Estimated Fair Value |
|
| Interest rate swap agreements - loans |
Other assets |
|
|
8.42 |
|
|
|
0.65 |
% |
|
1 month LIBOR |
|
$ |
30,000 |
|
|
|
1,192 |
|
The effects of fair value hedge relationships reported in interest income on loans on the consolidated statements of income for the six months ended June 30, 2022 and 2021 were as follows (in thousands):
| |
|
Six Months Ended June 30, |
|
| Gain (loss) on fair value hedging relationship |
|
2022 |
|
|
2021 |
|
| Interest rate swap agreements - loans: |
|
|
|
|
|
|
|
|
| Hedged items |
|
$ |
(2,368 |
) |
|
|
(875 |
) |
| Derivative designated as hedging instruments |
|
|
2,394 |
|
|
|
885 |
|
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, 2022 and December 31, 2021 (in thousands):
| |
|
Carrying Amount of the Hedged Assets |
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets |
|
| Line item on the balance sheet |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
| Loans |
|
$ |
26,349 |
|
|
|
28,717 |
|
|
|
(3,651 |
) |
|
|
(1,283 |
) |
Mortgage Banking Derivatives
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors under the Bank's mandatory delivery program are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. At June 30, 2022 and December 31, 2021, the Company had approximately $16,393,000 and $20,340,000, respectively, of interest rate lock commitments and approximately $15,000,000 and $20,500,000, respectively, of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by derivative assets of $190,000 and $657,000 at June 30, 2022 and December 31, 2021, respectively, and a derivative liability of $22,000 and a derivative asset of $6,000 at June 30, 2022 and December 31, 2021, respectively. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sale of loans.
The net gains (losses) relating to free-standing derivative instruments used for risk management is summarized below (in thousands):
| |
|
In Thousands |
|
| |
|
June 30, 2022 |
|
|
June 30, 2021 |
|
| Interest rate contracts for customers |
|
$ |
(467 |
) |
|
|
(68 |
) |
| Forward contracts related to mortgage loans held for sale and interest rate contracts |
|
|
(28 |
) |
|
|
147 |
|
The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as of June 30, 2022 and December 31, 2021 (in thousands):
| |
|
In Thousands |
|
| |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
| |
|
Notional Amount |
|
|
Fair Value |
|
|
Notional Amount |
|
|
Fair Value |
|
| Included in other assets (liabilities): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest rate contracts for customers |
|
$ |
16,393 |
|
|
|
190 |
|
|
|
20,340 |
|
|
|
657 |
|
| Forward contracts related to mortgage loans held-for-sale |
|
|
15,000 |
|
|
|
(22 |
) |
|
|
20,500 |
|
|
|
6 |
|
Note 5. Mortgage Servicing Rights
During the first quarter of 2022, the Company began selling a portfolio of residential mortgage loans to a third party, while retaining the rights to service the loans. Mortgage loans serviced for others are not reported as assets. The principal balances of these loans as of June 30, 2022 are as follows:
| |
|
In Thousands |
|
| June 30, |
|
2022 |
|
| Mortgage loan portfolios serviced for: |
|
|
|
|
| FHLMC |
|
$ |
65,288 |
|
For the six months ended June 30, 2022, the change in carrying value of the Company's mortgage servicing rights accounted for under the amortization method was as follows:
| |
|
In Thousands |
|
| June 30, |
|
2022 |
|
| Balance at beginning of period |
|
$ |
— |
|
| Servicing rights retained from loans sold |
|
|
1,277 |
|
| Amortization |
|
|
(264 |
) |
| Valuation Allowance Provision |
|
|
(90 |
) |
| Balance at end of period |
|
$ |
923 |
|
| Fair value, end of period |
|
$ |
923 |
|
The key data and assumptions used in estimating the fair value of the Company's mortgage servicing rights as of June 30, 2022 were as follows:
| |
|
June 30, 2022 |
|
| Prepayment speed |
|
|
6.95 |
% |
| Weighted-average life (in years) |
|
|
9.06 |
|
| Weighted-average note rate |
|
|
3.94 |
% |
| Weighted-average discount rate |
|
|
9.00 |
% |
Note 6. Equity Incentive Plans
In April 2009, the Company’s shareholders approved the Wilson Bank Holding Company 2009 Stock Option Plan (the “2009 Stock Option Plan”). The 2009 Stock Option Plan was effective as of April 14, 2009. Under the 2009 Stock Option Plan, awards could be in the form of options to acquire common stock of the Company. Subject to adjustment as provided by the terms of the 2009 Stock Option Plan, the maximum number of shares of common stock with respect to which awards could be granted under the 2009 Stock Option Plan was 100,000 shares. The 2009 Stock Option Plan terminated on April 13, 2019, and no additional awards may be issued under the 2009 Stock Option Plan. The awards granted under the 2009 Stock Option Plan prior to the plan's expiration will remain outstanding until exercised or otherwise terminated. As of June 30, 2022, the Company had outstanding 6,242 options under the 2009 Stock Option Plan with a weighted average exercise price of $35.22.
During the second quarter of 2016, the Company’s shareholders approved the Wilson Bank Holding Company 2016 Equity Incentive Plan, which authorizes awards of up to 750,000 shares of common stock. The 2016 Equity Incentive Plan was approved by the Board of Directors and effective as of January 25, 2016 and approved by the Company’s shareholders on April 12, 2016. On September 26, 2016, the Board of Directors approved an amendment and restatement of the 2016 Equity Incentive Plan (as amended and restated the “2016 Equity Incentive Plan”). Except for certain limitations, awards can be in the form of stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and restricted share units, performance awards and other stock-based awards. As of June 30, 2022, the Company had 195,476 shares remaining available for issuance under the 2016 Equity Incentive Plan. As of June 30, 2022, the Company had outstanding 253,336 options with a weighted average exercise price of $55.41 and 186,240 cash-settled stock appreciation rights with a weighted average exercise price of $53.25 under the 2016 Equity Incentive Plan.
As of June 30, 2022, the Company had outstanding 259,578 stock options with a weighted average exercise price of $54.92 and 186,240 cash-settled stock appreciation rights each with a weighted average exercise price of $53.25.
The following table summarizes information about stock options and cash-settled SARs for the six months ended June 30, 2022 and 2021:
| | | June 30, 2022 | | | June 30, 2021 | |
| | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
| Options and SARs outstanding at beginning of period | | | 357,254 | | | $ | 50.18 | | | | 284,591 | | | $ | 43.71 | |
| Granted | | | 114,332 | | | | 64.06 | | | | 24,999 | | | | 59.02 | |
| Exercised | | | (24,601 | ) | | | 41.55 | | | | (30,601 | ) | | | 40.17 | |
| Forfeited or expired | | | (1,167 | ) | | | 46.81 | | | | — | | | | — | |
| Outstanding at end of period | | | 445,818 | | | $ | 54.22 | | | | 278,989 | | | $ | 45.47 | |
| Options and SARs exercisable at June 30 | | | 173,425 | | | $ | 43.27 | | | | 156,360 | | | $ | 42.11 | |
As of June 30, 2022, there was $5,217,000 of total unrecognized cost related to non-vested share-based compensation arrangements granted under the Company's equity incentive plans. The cost is expected to be recognized over a weighted-average period of 4.15 years.
Note 7. Regulatory Capital
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of June 30, 2022, the Bank and the Company meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is classified as adequately capitalized or lower, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is growth and expansion, and capital restoration plans are required. As of June 30, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
The Company’s and Wilson Bank’s actual capital amounts and ratios as of June 30, 2022 and December 31, 2021 are presented in the following tables. The capital conservation buffer of 2.5% is not included in the required minimum ratios of the tables presented below.
| |
|
Actual |
|
|
Minimum Capital Adequacy |
|
|
For Classification Under Corrective Action Plan as Well Capitalized |
|
| |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
| |
|
(dollars in thousands) |
|
| June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
$ |
478,805 |
|
|
|
13.4 |
% |
|
$ |
284,963 |
|
|
|
8.0 |
% |
|
$ |
356,203 |
|
|
|
10.0 |
% |
| Wilson Bank |
|
|
478,352 |
|
|
|
13.4 |
|
|
|
285,375 |
|
|
|
8.0 |
|
|
|
356,718 |
|
|
|
10.0 |
|
| Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
|
439,508 |
|
|
|
12.3 |
|
|
|
213,722 |
|
|
|
6.0 |
|
|
|
284,962 |
|
|
|
8.0 |
|
| Wilson Bank |
|
|
439,055 |
|
|
|
12.3 |
|
|
|
214,030 |
|
|
|
6.0 |
|
|
|
285,374 |
|
|
|
8.0 |
|
| Common equity Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
|
439,469 |
|
|
|
12.3 |
|
|
|
160,291 |
|
|
|
4.5 |
|
|
|
N/A |
|
|
|
N/A |
|
| Wilson Bank |
|
|
439,016 |
|
|
|
12.3 |
|
|
|
160,523 |
|
|
|
4.5 |
|
|
|
231,866 |
|
|
|
6.5 |
|
| Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
|
439,508 |
|
|
|
10.7 |
|
|
|
164,159 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
| Wilson Bank |
|
|
439,055 |
|
|
|
10.7 |
|
|
|
163,960 |
|
|
|
4.0 |
|
|
|
204,949 |
|
|
|
5.0 |
|
| |
|
Actual |
|
|
Minimum Capital Adequacy |
|
|
For Classification Under Corrective Action Plan as Well Capitalized |
|
| |
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
| |
|
(dollars in thousands) |
|
| December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
$ |
455,813 |
|
|
|
13.9 |
% |
|
$ |
261,404 |
|
|
|
8.0 |
% |
|
$ |
326,755 |
|
|
|
10.0 |
% |
| Wilson Bank |
|
|
452,130 |
|
|
|
13.8 |
|
|
|
261,317 |
|
|
|
8.0 |
|
|
|
326,646 |
|
|
|
10.0 |
|
| Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
|
415,226 |
|
|
|
12.7 |
|
|
|
196,052 |
|
|
|
6.0 |
|
|
|
261,403 |
|
|
|
8.0 |
|
| Wilson Bank |
|
|
411,543 |
|
|
|
12.6 |
|
|
|
195,987 |
|
|
|
6.0 |
|
|
|
261,316 |
|
|
|
8.0 |
|
| Common equity Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
|
415,226 |
|
|
|
12.7 |
|
|
|
147,039 |
|
|
|
4.5 |
|
|
|
N/A |
|
|
|
N/A |
|
| Wilson Bank |
|
|
411,543 |
|
|
|
12.6 |
|
|
|
146,990 |
|
|
|
4.5 |
|
|
|
212,319 |
|
|
|
6.5 |
|
| Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consolidated |
|
|
415,226 |
|
|
|
10.8 |
|
|
|
154,280 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
| Wilson Bank |
|
|
411,543 |
|
|
|
10.7 |
|
|
|
154,230 |
|
|
|
4.0 |
|
|
|
192,787 |
|
|
|
5.0 |
|
Dividend Restrictions
The Company and the Bank are subject to dividend restrictions set forth by the Tennessee Department of Financial Institutions and federal banking agencies, as applicable. Additional restrictions may be imposed by the Tennessee Department of Financial Institutions and federal banking agencies under the powers granted to them by law.
Note 8. 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. GAAP and expands disclosures about fair value measurements. The definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price (i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date). The statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.
Valuation Hierarchy
FASB ASC 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
| | • | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| | | |
| | • | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| | | |
| | • | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Assets
Securities available-for-sale — Where quoted prices are available for identical securities in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other financial products. If quoted market prices are not available, then fair values are estimated by using pricing models that use observable inputs or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation and more complex pricing models or discounted cash flows are used, securities are classified within Level 3 of the valuation hierarchy.
Hedged loans — The fair value of our hedged loan portfolio is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction.
Collateral dependent loans – Collateral dependent loans are measured at the fair value of the collateral securing the loan less estimated selling costs. The fair value of real estate collateral is determined based on real estate appraisals which are generally based on recent sales of comparable properties which are then adjusted for property specific factors. Non-real estate collateral is valued based on various sources, including third party asset valuations and internally determined values based on cost adjusted for depreciation and other judgmentally determined discount factors. Collateral dependent loans are classified within Level 3 of the valuation hierarchy due to the unobservable inputs used in determining their fair value such as collateral values and the borrower's underlying financial condition.
Other real estate owned — Other real estate owned (“OREO”) represents real estate foreclosed upon by the Company through loan defaults by customers or acquired in lieu of foreclosure. Substantially all of these amounts relate to construction and land development loans, other loans secured by land, and commercial real estate loans for which the Company believes it has adequate collateral. Upon foreclosure, the property is recorded at the lower of cost or fair value, based on appraised value, less selling costs estimated as of the date acquired with any loss recognized as a charge-off through the allowance for credit losses. Additional OREO losses for subsequent valuation downward adjustments are determined on a specific property basis and are included as a component of noninterest expense along with holding costs. Any gains or losses realized at the time of disposal are also reflected in noninterest expense, as applicable. OREO is included in Level 3 of the valuation hierarchy due to the lack of observable market inputs into the determination of fair value. Appraisal values are property-specific and sensitive to the changes in the overall economic environment.
Mortgage loans held-for-sale — Mortgage loans held-for-sale are carried at fair value, and are classified within Level 2 of the valuation hierarchy. The fair value of mortgage loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.
Derivatives — The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).
Mortgage servicing rights — The fair value of servicing rights is based on the present value of estimated future cash flows of mortgages sold, stratified by rate and maturity date. Assumptions that are incorporated in the valuation of servicing rights include assumptions about prepayment speeds on mortgages and the cost to service loans.
Other investments — Included in other investments are investments recorded at fair value primarily in certain nonpublic investments and funds. The valuation of these nonpublic investments requires management judgment due to the absence of observable quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties. These investments are included in Level 3 of the valuation hierarchy if the entities and funds are not widely traded and the underlying investments are in privately-held and/or start-up companies for which market values are not readily available.
The following tables present the financial instruments carried at fair value as of June 30, 2022 and December 31, 2021, by caption on the consolidated balance sheet and by FASB ASC 820 valuation hierarchy (as described above):
| | | Assets and Liabilities Measured at Fair Value on a Recurring Basis | |
| | | (In Thousands) | |
| | | Total Carrying Value in the Consolidated Balance Sheet | | | Quoted Market Prices in an Active Market (Level 1) | | | Models with Significant Observable Market Parameters (Level 2) | | | Models with Significant Unobservable Market Parameters (Level 3) | |
| June 30, 2022 | | | | | | | | | | | | | | | | |
| Hedged Loans | | $ | 26,349 | | | | — | | | | 26,349 | | | | — | |
| Investment securities available-for-sale: | | | | | | | | | | | | | | | | |
| U.S. Treasury and other U.S. government agencies | | | 26,166 | | | | 26,166 | | | | — | | | | — | |
| U.S. Government sponsored enterprises | | | 158,080 | | | | — | | | | 158,080 | | | | — | |
| Mortgage-backed securities | | | 492,073 | | | | — | | | | 492,073 | | | | — | |
| Asset-backed securities | | | 41,975 | | | | — | | | | 41,975 | | | | — | |
| Corporate bonds | | | 2,451 | | | | — | | | | 2,451 | | | | — | |
| State and municipal securities | | | 195,362 | | | | — | | | | 195,362 | | | | — | |
| Total investment securities available-for-sale | | | 916,107 | | | | 26,166 | | | | 889,941 | | | | — | |
| Mortgage loans held for sale | | | 6,191 | | | | — | | | | 6,191 | | | | — | |
| Derivatives | | | 3,754 | | | | — | | | | 3,754 | | | | — | |
| Mortgage servicing rights | | | 923 | | | | — | | | | 923 | | | | — | |
| Other investments | | | 2,026 | | | | — | | | | — | | | | 2,026 | |
| Total assets | | $ | 955,350 | | | | 26,166 | | | | 927,158 | | | | 2,026 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | | | | |
| Hedged Loans | | $ | 28,717 | | | | — | | | | 28,717 | | | | — | |
| Investment securities available-for-sale: | | | | | | | | | | | | | | | | |
| U.S. Treasury and other U.S. government agencies | | | 7,221 | | | | 7,221 | | | | — | | | | — | |
| U.S. Government sponsored enterprises | | | 159,230 | | | | — | | | | 159,230 | | | | — | |
| Mortgage-backed securities | | | 461,777 | | | | — | | | | 461,777 | | | | — | |
| Asset-backed securities | | | 46,713 | | | | — | | | | 46,713 | | | | — | |
| Corporate bonds | | | 2,575 | | | | — | | | | 2,575 | | | | — | |
| State and municipal securities | | | 220,069 | | | | — | | | | 220,069 | | | | — | |
| Total investment securities available-for-sale | | | 897,585 | | | | 7,221 | | | | 890,364 | | | | — | |
| Mortgage loans held for sale | | | 11,843 | | | | — | | | | 11,843 | | | | — | |
| Derivatives | | | 1,855 | | | | — | | | | 1,855 | | | | — | |
| Other investments | | | 2,034 | | | | — | | | | — | | | | 2,034 | |
| Total assets | | $ | 942,034 | | | | 7,221 | | | | 932,779 | | | | 2,034 | |
| | | | | | | | | | | | | | | | | |
| | | Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis | |
| | | (In Thousands) | |
| | | Total Carrying Value in the Consolidated Balance Sheet | | | Quoted Market Prices in an Active Market (Level 1) | | | Models with Significant Observable Market Parameters (Level 2) | | | Models with Significant Unobservable Market Parameters (Level 3) | |
| June 30, 2022 | | | | | | | | | | | | | | | | |
| Other real estate owned | | $ | — | | | | — | | | | — | | | | — | |
| Collateral dependent loans (¹) | | | 650 | | | | — | | | | — | | | | 650 | |
| Total | | $ | 650 | | | | — | | | | — | | | | 650 | |
| December 31, 2021 | | | | | | | | | | | | | | | | |
| Other real estate owned | | $ | — | | | | — | | | | — | | | | — | |
| Impaired loans, net (¹) | | | 668 | | | | — | | | | — | | | | 668 | |
| Total | | $ | 668 | | | | — | | | | — | | | | 668 | |
| (1) | As of June 30, 2022 no valuation allowance was recorded on collateral dependent loans. As of December 31, 2021 no valuation allowance was recorded on impaired loans. |
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at June 30, 2022 and December 31, 2021:
| | | Valuation Techniques (1) | | Significant Unobservable Inputs | | Weighted Average | |
| Collateral dependent loans | | Appraisal | | Estimated costs to sell | | 10% | |
| Other real estate owned | | Appraisal | | Estimated costs to sell | | 10% | |
| (1) The fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent. |
In the case of its investment securities portfolio, the Company monitors the valuation technique utilized by various pricing agencies to ascertain when transfers between levels have been affected. The nature of the remaining assets and liabilities is such that transfers in and out of any level are expected to be rare. For the six months ended June 30, 2022, there were no transfers between Levels 1, 2 or 3.
The table below includes a rollforward of the balance sheet amounts for the six months ended June 30, 2022 and 2021 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology (in thousands):
| | | For the Six Months Ended June 30, | |
| | | 2022 | | | 2021 | |
| | | Other Assets | | | Other Liabilities | | | Other Assets | | | Other Liabilities | |
| Fair value, January 1 | | $ | 2,034 | | | | — | | | $ | — | | | | — | |
| Total realized gains (losses) included in income | | | (8 | ) | | | — | | | | — | | | | — | |
| Change in unrealized gains/losses included in other comprehensive income for assets and liabilities still held at June 30 | | | — | | | | — | | | | — | | | | — | |
| Purchases, issuances and settlements, net | | | — | | | | — | | | | — | | | | — | |
| Transfers out of Level 3 | | | — | | | | — | | | | — | | | | — | |
| Fair value, June 30 | | $ | 2,026 | | | | — | | | $ | — | | | | — | |
| Total realized gains (losses) included in income related to financial assets and liabilities still on the consolidated balance sheet at June 30 | | $ | (8 | ) | | | — | | | $ | — | | | | — | |
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 or observable components are not available, fair values are based on estimates using discounted cash flow models. Those models are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and borrower creditworthiness. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2022 and December 31, 2021. 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 and cash equivalents — The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Loans — The fair value of our loan portfolio includes a credit risk factor in the determination of the fair value of our loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. Our loan portfolio is initially fair valued using a segmented approach. We divide our loan portfolio into the following categories: variable rate loans, collateral dependent loans and all other loans. The results are then adjusted to account for credit risk.
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for collateral dependent loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk to determine the exit price.
Deposits and Federal Home Loan Bank borrowings — Fair values for deposits and Federal Home Loan Bank borrowings are estimated using discounted cash flow models, using current market interest rates offered on deposits with similar remaining maturities.
Restricted equity securities — It is not practical to determine the fair value of Federal Home Loan Bank or Federal Reserve Bank stock due to restrictions placed on its transferability.
Off-Balance Sheet Instruments — The fair values of the Company’s off-balance-sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value to the Company until such commitments are funded.
The following table presents the carrying amounts, estimated fair value and placement in the fair valuation hierarchy of the Company’s financial instruments at June 30, 2022 and December 31, 2021. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.
| | | Carrying/ Notional | | | Estimated | | | Quote Market Prices in an Active Market | | | Models with Significant Observable Market Parameters | | | Models with Significant Unobservable Market Parameters | |
| (in Thousands) | | Amount | | | Fair Value (¹) | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| June 30, 2022 | | | | | | | | | | | | | | | | | | | | |
| Financial assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 235,768 | | | | 235,768 | | | | 235,768 | | | | — | | | | — | |
| Loans, net | | | 2,737,002 | | | | 2,707,378 | | | | — | | | | — | | | | 2,707,378 | |
| Restricted equity securities | | | 5,089 | | | | NA | | | | NA | | | | NA | | | | NA | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 3,710,806 | | | | 3,166,700 | | | | — | | | | — | | | | 3,166,700 | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | | | | | | | | |
| Financial assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 453,418 | | | | 453,418 | | | | 453,418 | | | | — | | | | — | |
| Loans, net | | | 2,444,282 | | | | 2,439,539 | | | | — | | | | — | | | | 2,439,539 | |
| Restricted equity securities | | | 5,089 | | | | NA | | | | NA | | | | NA | | | | NA | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 3,555,071 | | | | 3,227,520 | | | | — | | | | — | | | | 3,227,520 | |
| (1) | Estimated fair values are consistent with an exit-price concept. The assumptions used to estimate the fair values are intended to approximate those that a market-participant would realize in a hypothetical orderly transaction. |
Note 9. 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, 2022, 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, 2022.
The Company’s effective tax rate for the six months ended June 30, 2022 and 2021 was 22.8% and 23.8%, respectively. The difference between the effective tax rate and the federal and state income tax statutory rate of 26.14% at June 30, 2022 and 2021 is primarily due to investments in bank qualified municipal securities, participation in the Tennessee Community Investment Tax Credit (CITC) program, and tax benefits associated with share-based compensation, and bank-owned life insurance, offset in part by the limitation on deductibility of meals and entertainment expense and non-deductible executive compensation.
As of and for the six months ended June 30, 2022, the Company has not accrued or recognized interest or 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 the Bank 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, 2018 through 2021 and the IRS for the years ended December 31, 2019 through 2021.
Note 10. Earnings Per Share
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period, adjusted for stock splits. The computation of diluted earnings per share for the Company begins with the basic earnings per share and includes 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 and six months ended June 30, 2022 and 2021:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | | (Dollars in Thousands Except Share and Per Share Amounts) | | | (Dollars in Thousands Except Share and Per Share Amounts) | |
| Basic EPS Computation: | | | | | | | | | | | | | | | | |
| Numerator – Earnings available to common stockholders | | $ | 14,139 | | | $ | 11,139 | | | $ | 25,512 | | | $ | 22,283 | |
| Denominator – Weighted average number of common shares outstanding | | | 11,339,057 | | | | 11,084,411 | | | | 11,307,763 | | | | 11,081,894 | |
| Basic earnings per common share | | $ | 1.25 | | | $ | 1.00 | | | $ | 2.26 | | | $ | 2.01 | |
| Diluted EPS Computation: | | | | | | | | | | | | | | | | |
| Numerator – Earnings available to common stockholders | | $ | 14,139 | | | $ | 11,139 | | | $ | 25,512 | | | $ | 22,283 | |
| Denominator – Weighted average number of common shares outstanding | | | 11,339,057 | | | | 11,084,411 | | | | 11,307,763 | | | | 11,081,894 | |
| Dilutive effect of stock options | | | 31,198 | | | | 30,483 | | | | 31,501 | | | | 29,814 | |
| Weighted average diluted common shares outstanding | | | 11,370,255 | | | | 11,114,894 | | | | 11,339,264 | | | | 11,111,708 | |
| Diluted earnings per common share | | $ | 1.24 | | | $ | 1.00 | | | $ | 2.25 | | | $ | 2.01 | |
Note 11. Commitments and Contingent Liabilities
In the normal course of business, the Bank 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 (the Bank's 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 sooner 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 Bank under certain prescribed circumstances. Subsequently, the Bank would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.
The Bank 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 and cash equivalents, 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.
A summary of the Company’s total contractual amount for all off-balance sheet commitments at June 30, 2022 is as follows:
| Commitments to extend credit | | $ | 1,273,534,000 | |
| Standby letters of credit | | $ | 98,496,000 | |
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment.
Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 2 - Loans and Allowance for Credit Losses as if such commitments were funded.
The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures for the six months ended June 30, 2022 and 2021.
| | | (In Thousands) | |
| | | 2022 | | | 2021 | |
| Beginning balance, January 1 | | $ | 955 | | | | 693 | |
| Impact of adopting ASC 326 | | | 6,195 | | | | — | |
| Credit loss expense | | | 217 | | | | 137 | |
| Ending balance, June 30 | | $ | 7,367 | | | | 830 | |
The Bank originates residential mortgage loans, sells them to third-party purchasers, and may or may 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 to investors that follow guidelines of conventional government sponsored entities ("GSE") and the Department of Housing and Urban Development/U.S. Department of Veterans Affairs ("HUD/VA"). Generally, loans held for sale are underwritten by the Company, including HUD/VA loans. In the fourth quarter of 2018, the Bank began to participate in a mandatory delivery program that requires the Bank to deliver a particular volume of mortgage loans by agreed upon dates. A majority of the Bank’s secondary mortgage volume is delivered to the secondary market via mandatory delivery with the remainder done on a best efforts basis. The Bank does not realize any exposure delivery penalties as the mortgage department only bids loans post-closing to ensure that 100% of the loans are deliverable to the investors.
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 Bank 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 or the loan had an early payoff or payment default, the Bank 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 or due to early payoffs or payment defaults has been insignificant and has resulted in insignificant losses to the Company.
Based on information currently available, management believes that the Bank 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 or for early payoffs or payment defaults of such mortgage loans.
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, 2022 will not have a material impact on the Company’s consolidated financial statements.
Note 12. Subsequent Events
ASC 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Wilson Bank Holding Company evaluated all events or transactions that occurred after June 30, 2022, through the date of the issued financial statements.